The income statement for Huerra Company for last year is provided below: Sales Less: Variable expenses Contribution margin Less: Fixed expense Net operating income Less: Income taxes @ 30% Net income Total $ 15,200,000 12,160,000 3,040,000 1,520,000 1,520,000 456,000 $ 1,064,000 Unit $ 304.00 243.20 60.80 30.40 30.40 9.12 $ 21.28 The company had average operating assets of $8,000,000 during the year. 2. Consider each of the following questions separately and then compute the new ROI figure. Indicate whether the ROI will increase, decrease, or remain unchanged as a result of the events described. a. By using JIT, the company is able to reduce the average level of inventory by $500,000. (The released funds are used to pay off short-term creditors.) (Round intermediate calculation to 2 decimal places. Enter your percentage answer rounded to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) Answer is complete but not entirely correct. ROI 20.20 X % increase b. The company achieves a savings of $15 per unit by using cheaper materials. (Round intermediate and final answer to 2 decimal places.) Answer is complete but not entirely correct. 1.90 X % unchanged ROI c. The company issues bonds and uses the proceeds to purchase machinery and equipment, thus increasing the average assets by $500,000. Interest on the bonds is $50,000 per year. Sales remain unchanged. The new, more efficient equipment reduces fixed production costs by $25,000 per year. (Round intermediate and final answer to 2 decimal places.) Answer is complete but not entirely correct. ROI 18.18 X % decrease d. As a result of a more intense effort by the sales staff, sales are increased by 10%; operating assets remain unchanged. (Round intermediate and final answer to 2 decimal places.) Answer is complete but not entirely correct. ROI 22.78 % increase e. Obsolete items of inventory carried on the records at a cost of $110,000 are scrapped and sold for 25% of the book value. (Use full amount of scrap while calculating average operating assets. Round intermediate calculation to 2 decimal places. Enter your percentage answer rounded to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) ROI % f. The company uses $500,000 in cash (received on accounts receivable) to repurchase and retire some of its common shares. The net effect of this transaction is a $500,000 change in average operating assets. (Use full amount of scrap while calculating average operating assets. Round intermediate calculation to 2 decimal places. Enter your percentage answer rounded to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) ROL % g. The company pays a cash dividend to its shareholders, which results in a $400,000 change in average operating assets. (Round intermediate calculation to 2 decimal places. Enter your percentage answer rounded to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) ROI %
