Question
The income statement for Huerra Company for last year is provided below: Total Unit Sales $ 12,000,000 $ 240.00 Less: Variable expenses 6,000,000 120.00 Contribution
| The income statement for Huerra Company for last year is provided below: |
| Total | Unit | |||||||
| Sales | $ | 12,000,000 | $ | 240.00 | ||||
| Less: Variable expenses | 6,000,000 | 120.00 | ||||||
| Contribution margin | 6,000,000 | 120.00 | ||||||
| Less: Fixed expense | 3,000,000 | 60.00 | ||||||
| Net operating income | 3,000,000 | 60.00 | ||||||
| Less: Income taxes @ 30% | 900,000 | 18.00 | ||||||
| Net income | $ | 2,100,000 | $ | 42.00 | ||||
| The company had average operating assets of $10,000,000 during the year. |
| Required: |
| 1. | Compute the companys ROI for the period using the ROI formula stated in terms of margin and turnover. (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).) |
| 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).) |
| b. | The company achieves a savings of $12 per unit by using cheaper materials. (Round intermediate and final answer to 2 decimal places.) |
| c. | The company issues bonds and uses the proceeds to purchase machinery and equipment, thus increasing the average assets by $400,000. Interest on the bonds is $40,000 per year. Sales remain unchanged. The new more efficient equipment reduces fixed production costs by $20,000 per year. (Round intermediate and final answer to 2 decimal places.) |
| d. | As a result of a more intense effort by the sales staff, sales are increased by 20%; operating assets remain unchanged. (Round intermediate and final answer to 2 decimal places.) |
| e. | Obsolete items of inventory carried on the records at a cost of $200,000 are scrapped and sold for 20% 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).) |
| f. | The company uses $200,000 in cash (received on accounts receivable) to repurchase and retire some of its common shares. The net effect of this transaction is a $200,000 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).) |
| g. | The company pays a cash dividend to its shareholders, which results in a $200,000 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).) |
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