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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

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 operating income

360,000

7.20

Income taxes @ 30%

108,000

2.16

Net income

$ 252,000

$ 5.04

The company had average operating assets of $2,000,000 during the year.

Required:

  1. Compute the companys margin, turnover, and return on investment (ROI) for the period.

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, and then compute the new ROI figure. Consider each question separately, starting in each case from the data used to compute the original ROI in (1) above.

  1. Using Lean Production, the company is able to reduce the average level of inventory by $400,000.
  2. The company achieves a cost savings of $32,000 per year by using less costly materials.
  3. The company purchases machinery and equipment that increases average operating assets by $500,000. Sales remain unchanged. The new, more efficient equipment reduces production costs by $20,000 per year.
  4. As a result of a more intense effort by salespeople, sales are increased by 20%; operating assets remain unchanged.
  5. At the beginning of the year, obsolete inventory carried on the books at a cost of $40,000 is scrapped and written off as a loss, thereby lowering net operating income.
  6. At the beginning of the year, the company uses $200,000 of cash (received on accounts receivable) to repurchase some of its common stock.

Required:

  1. Using a 16% discount rate, compute the net present value of each of the three investments. On which investment(s) did Linda earn a 16% rate of return? (Round computations to the nearest whole dollar.)
  2. Considering all three investments together, did Linda earn a 16% rate of return? Explain.
  3. Linda wants to use the $239,700 proceeds ($160,000 + $27,000 + $52,700 = $239,700) from sale of the securities to open a retail store under a 12-year franchise contract. What minimum annual net cash inflow must the store generate for Linda to earn a 14% return over the 12-year period? Round computations to the nearest whole dollar.

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