The income statement for Huerra Company for last year is provided below: Sales Less: Variable expenses Total $ 16,000,000 12,800,000 Unit $320.00 256.00 Contribution margin Less: Fixed expense 3,200,000 1,600,000 64.00 32.00 Net operating income Less: Income taxes @ 30% 1,600,000 480,000 32.00 9.60 Net income $ 1,120,000 $ 22.40 The company had average operating assets of $5,000,000 during the year. Required: 1. Compute the company's 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).) ROI : % 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 $200,000. (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).) ROI % b. The company achieves a savings of $16 per unit by using cheaper materials. (Round intermediate and final answer to 2 decimal places.) ROI % c. The company issues bonds and uses the proceeds to purchase machinery and equipment, thus increasing the average assets by $300,000. Interest on the bonds is $30,000 per year. Sales remain unchanged. The new more efficient equipment reduces fixed production costs by $15,000 per year. (Round intermediate and final answer to 2 decimal places.) ROI % d. As a result of a more intense effort by the sales staff, sales are increased by 15%; operating assets remain unchanged. (Round intermediate and final answer to 2 decimal places.) ROI % e. Obsolete items of inventory carried on the records at a cost of $200,000 are scrapped and sold for 15% 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 $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).) ROI % g. The company pays a cash dividend to its shareholders, which results in a $300,000 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 % C
