Question
The contribution format income statement for Strickland, Inc., for its most recent period is given below: Total Unit Sales $ 990,000 $ 49.50 Variable expenses
The contribution format income statement for Strickland, Inc., for its most recent period is given below: |
| Total | Unit | ||
Sales | $ | 990,000 | $ | 49.50 |
Variable expenses |
| 594,000 |
| 29.70 |
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Contribution margin |
| 396,000 |
| 19.80 |
Fixed expenses |
| 318,000 |
| 15.90 |
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Net operating income |
| 78,000 |
| 3.90 |
Income taxes @ 40% |
| 31,200 |
| 1.56 |
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Net income | $ | 46,800 | $ | 2.34 |
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The company had average operating assets of $503,000 during the period. |
Required: | |
1. | Compute the companys return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. (Round your intermediate calculations and final answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) |
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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 original ROI computed in (1) above. |
2. | The company achieves a cost savings of $6,000 per period by using less costly materials. (Round your intermediate calculations and Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) |
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3. | Using Lean Production, the company is able to reduce the average level of inventory by $91,000. (The released funds are used to pay off bank loans.) (Round your intermediate calculations and Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) |
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4. | Sales are increased by $198,000; operating assets remain unchanged. (Round your intermediate calculations and Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) |
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5. | The company issues bonds and uses the proceeds to purchase $128,000 in machinery and equipment at the beginning of the period. Interest on the bonds is $14,000 per period. Sales remain unchanged. The new, more efficient equipment reduces production costs by $5,000 per period. (Round your intermediate calculations and Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) |
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6. | The company invests $182,000 of cash (received on accounts receivable) in a plot of land that is to be held for possible future use as a plant site. (Round your intermediate calculations and Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) |
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7. | Obsolete inventory carried on the books at a cost of $17,000 is scrapped and written off as a loss. (Round your intermediate calculations and Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) |
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