The contribution format income statement for Huerra Company for last year is given below: Total Unit Sales $ $ 49.60 Variable expenses Contribution margin Fixed expenses Net operating income Income taxes e 40% 992,000 595,200 396,800 312,800 84,000 33,600 29.76 19.84 15.64 4.20 1.68 Net income $ 50,400 $ 2.52 The company had average operating assets of $502,000 during the year. Required: 1. Compute the company's return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. 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 data used to compute the original ROI in (1) above. 2. Using Lean Production, the company is able to reduce the average level of inventory by $110,000. (The released funds are used to pay off short-term creditors.) 3. The company achieves a cost savings of $12,000 per year by using less costly materials. 4. The company issues bonds and uses the proceeds to purchase machinery and equipment that increases average operating assets by $122,000. Interest on the bonds is $16,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $6,000 per year. 5. As a result of a more intense effort by sales people, sales are increased by 20%; operating assets remain unchanged. 6. At the beginning of the year, obsolete inventory carried on the books at a cost of $15,000 is scrapped and written off as a loss. 7. At the beginning of the year, the company uses $180,000 of cash (received on accounts receivable) to repurchase and retire some
The contribution format income statement for Huerra Company for last year is given below: Total Unit Sales $ $ 49.60 Variable expenses Contribution margin Fixed expenses Net operating income Income taxes e 40% 992,000 595,200 396,800 312,800 84,000 33,600 29.76 19.84 15.64 4.20 1.68 Net income $ 50,400 $ 2.52 The company had average operating assets of $502,000 during the year. Required: 1. Compute the company's return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. 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 data used to compute the original ROI in (1) above. 2. Using Lean Production, the company is able to reduce the average level of inventory by $110,000. (The released funds are used to pay off short-term creditors.) 3. The company achieves a cost savings of $12,000 per year by using less costly materials. 4. The company issues bonds and uses the proceeds to purchase machinery and equipment that increases average operating assets by $122,000. Interest on the bonds is $16,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $6,000 per year. 5. As a result of a more intense effort by sales people, sales are increased by 20%; operating assets remain unchanged. 6. At the beginning of the year, obsolete inventory carried on the books at a cost of $15,000 is scrapped and written off as a loss. 7. At the beginning of the year, the company uses $180,000 of cash (received on accounts receivable) to repurchase and retire some
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
need margin turnover and roi on question 4-7
Transcribed Image Text:The contribution format income statement for Huerra Company for last year is given below:
Total
Unit
Sales
$
992,000
$ 49.60
Variable expenses
29.76
595,200
396,800
312,800
84,000
Contribution margin
Fixed expenses
19.84
15.64
Net operating income
Income taxes @ 40%
4.20
33,600
1.68
Net income
$
50,400
$
2.52
The company had average operating assets of $502,000 during the year.
Required:
1. Compute the company's return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover.
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 data
used to compute the original ROI in (1) above.
2. Using Lean Production, the company is able to reduce the average level of inventory by $110,000. (The released funds are used to
pay off short-term creditors.)
3. The company achieves a cost savings of $12,000 per year by using less costly materials.
4. The company issues bonds and uses the proceeds to purchase machinery and equipment that increases average operating assets
by $122,000. Interest on the bonds is $16,000 per year. Sales remain unchar
production costs by $6,000 per year.
5. As a result of a more intense effort by sales people, sales are increased by 20%; operating assets remain unchanged.
6. At the beginning of the year, obsolete inventory carried on the books at a cost of $15,000 is scrapped and written off as a loss.
7. At the beginning of the year, the company uses $180,000 of cash (received on accounts receivable) to repurchase and retire some
of its common stock.
ed. The new, more efficient equipm
reduces
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In Step 1, operating income. I understand where the 84,000 comes from but where does the 6,000 come from?
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