The contribution format income statement for Huerra Company for last year is given below: Total Unit $ 49.90 $ 998,000 598,800 399,200 319,200 80,000 32,000 Sales Variable expenses Contribution margin Fixed expenses Net operating income Income taxes @ 40% 29.94 19.96 15.96 4.00 1.60 Net income $ 48,000 $ 2.40 The company had average operating assets of $506,000 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 $106,000. (The released funds are used to pay off short-term creditors.) 3. The company achieves a cost savings of $7,000 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 $129,000. Interest on the bonds is $17,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $5,000 per year. 5. As a result of a more intense effort by salespeople, sales are increased by 15%; operating assets remain unchanged. 6. At the beginning of the year, obsolete inventory carried on the books at a cost of $19,000 is scrapped and written off as a loss. 7. At the beginning of the year, the company uses $181,000 of cash (received on accounts receivable) to repurchase and retire
The contribution format income statement for Huerra Company for last year is given below: Total Unit $ 49.90 $ 998,000 598,800 399,200 319,200 80,000 32,000 Sales Variable expenses Contribution margin Fixed expenses Net operating income Income taxes @ 40% 29.94 19.96 15.96 4.00 1.60 Net income $ 48,000 $ 2.40 The company had average operating assets of $506,000 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 $106,000. (The released funds are used to pay off short-term creditors.) 3. The company achieves a cost savings of $7,000 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 $129,000. Interest on the bonds is $17,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $5,000 per year. 5. As a result of a more intense effort by salespeople, sales are increased by 15%; operating assets remain unchanged. 6. At the beginning of the year, obsolete inventory carried on the books at a cost of $19,000 is scrapped and written off as a loss. 7. At the beginning of the year, the company uses $181,000 of cash (received on accounts receivable) to repurchase and retire
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:The contribution format income statement for Huerra Company for last year is given below:
Total
Unit
$ 998,000
598,800
399,200
319,200
Sales
$ 49.90
Variable expenses
Contribution margin
Fixed expenses
29.94
19.96
15.96
Net operating income
Income taxes @ 40%
80,000
4.00
32,000
1.60
Net income
$ 48,000
$ 2.40
The company had average operating assets of $506,000 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 $106,000. (The released funds are
used to pay off short-term creditors.)
3. The company achieves a cost savings of $7,000 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 $129,000. Interest on the bonds is $17,000 per year. Sales remain unchanged. The new, more efficient
equipment reduces production costs by $5,000 per year.
5. As a result of a more intense effort by salespeople, sales are increased by 15%; operating assets remain unchanged.
6. At the beginning of the year, obsolete inventory carried on the books at a cost of $19,000 is scrapped and written off as a
loss.
7. At the beginning of the year, the company uses $181,000 of cash (received on accounts receivable) to repurchase and retire
some of its common stock.
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