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Module 5 Case 4 The contribution format income statement for Huerra Company for last year is given below: Total Unit Sales ....................... $4,000,000 $80.00 Variable expenses ............. 2,800,000 56.00 Contribution margin ............ 1,200,000 24.00 Fixed expenses ............... 840,000 16.80 Net operang income .......... 360,000 7.20 Income taxes 6 30% .......... 108,000 2.1 6 Net operating Income .......... $ 252.000 $ 5.04 The company had average operating assets of $2,000,000 during the year. Required: 1. Compute the company's return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. For each of the following questions, indicate whether the margin and turnover will increase, decrease, or remain unchanged as a result of the events described. Consider each question separately (independently), starting in each case from the data used to compute the original ROI in (1) above. 2. Using Lean Production, the company is able to reduce the average level of inventory by $400,000. Sales and profits will remain the same. (The released funds are used to pay off short-term creditors.) 3. The company achieves a cost savings of $32,000 per year by using less costly materials. 4. The company reduces fixed expenses by $100,000 by cutting advertising. This results in a 10% reduction in sales. Assets remain unchanged. 5. As a result of a more intense effort by salespeople, sales are increased by 20%; fixed costs and operating assets remain unchanged. 6. Obsolete inventory carried on the books at a cost of $40,000 is scrapped and written off as a loss. 7. The company uses $200,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock. ANSWER .f. 1. Margin = Turnover = ROI = 2. For 2 through 7, just state if Margin will Increase (I), Decrease (D), or remain the same (NA), Turnover will I, D, or NA. HINT: carry to the nearest 2 decimals of a %; may need to plug in numbers if both numerator and denominator move in the same direction (both increase or both decrease). Margin = Turnover = Margin = Turnover = Margin = Turnover = Margin = Turnover = Margin = Turnover = Margin = Turnover =