The income statement for Huerra Company for last year is provided below:

Total UnitSales$11,400,000 $228.00Less: Variable expenses 7,980,000 159.60Contribution margin 3,420,000 68.40Less: Fixed expense 1,710,000 34.20Net operating income 1,710,000 34.20Less: Income taxes @ 30% 513,000 10.26Net income$1,197,000 $23.94

The company had average operating assets of $6,000,000 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 $600,000. (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 $11 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 $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.)

d. As a result of a more intense effort by the sales staff, sales are increased by 25%; 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 $180,000 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).

f. The company uses $600,000 in cash (received on accounts receivable) to repurchase and retire some of its common shares. The net effect of this transaction is a $600,000 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 $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).)

PART 2

I know headquarters wants us to add on that new product line, said Dell Havasi, manager of Billings Companys office products division. But I want to see the numbers before I make any move. Our division has led the company for three years, and I dont want any letdown.

Billings Company is a decentralized organization with five autonomous divisions. The divisions are evaluated on the basis of the return that they are able to generate on invested assets, with year-end bonuses given to the divisional managers who have the highest ROI figures. Operating results for the companys office products division for the most recent year are as follows:

Sales$180,000,000Less: Variable expenses 117,000,000Contribution margin 63,000,000Less: Fixed expenses 50,400,000Net operating income$12,600,000Divisional operating assets$72,000,000

The company had an overall ROI of 13.5% last year (considering all divisions). The office products division has an opportunity to add a new product line that would require an additional investment in operating assets of $18,000,000. The cost and revenue characteristics of the new product line per year would be as follows:

Sales$36,000,000 Variable expenses 65% of salesFixed expenses$10,080,000

Required:

1. Compute the office products divisions ROI for the most recent year; also compute the ROI if the new product line were added. (Do not round intermediate calculations. Round "Percentage" answers to 2 decimal places, (i.e., 0.1234 should be considered as 12.34%).)

2. If you were in Dell Havasis position, would you be inclined to accept or reject the new product line?

multiple choice 1

Accept

Reject

3. This part of the question is not part of your Connect assignment.

4. Suppose that the company views a return of 13.0% on invested assets as being the minimum that any division should earn and that performance is evaluated by the RI approach.

a. Compute the office products divisions RI for the most recent year; also compute the RI as it would appear if the new product line were added.

b. Under these circumstances, if you were in Dell Havasis position, would you accept or reject the new product line?

multiple choice 2

Accept

Reject