Required 1: Compute the company’s return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. (Round your intermediate calculations and final answer to 2 decimal places.) Margin not attempted % Turnover not attempted ROI not attempted % Required 2: Using Lean Production, the company is able to reduce the average level of inventory by $96,000. (The released funds are used to pay off short-term creditors.) (Round your intermediate calculations and final answers to 2 decimal places.) Effect Margin % Turnover ROI % Required 3: The company achieves a cost savings of $14,000 per year by using less costly materials. (Round your intermediate calculations and final answers to 2 decimal places.) Effect Margin % Turnover ROI % Required 4: The company issues bonds and uses the proceeds to purchase machinery and equipment that increases average operating assets by $124,000. Interest on the bonds is $15,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $8,000 per year. (Do not round intermediate calculations and round your final answers to 2 decimal places.) Effect Margin % Turnover ROI % Required 5: As a result of a more intense effort by sales people, sales are increased by 15%; operating assets remain unchanged. (Round your intermediate calculations and final answers to 2 decimal places.) Effect Margin % Turnover ROI % Required 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. (Round your intermediate calculations and final answers to 2 decimal places.) Effect Margin % Turnover ROI % Required 7: At the beginning of the year, the company uses $176,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock. (Round your intermediate calculations and final answers to 2 decimal places.) Effect Margin % Turnover ROI %

Required 1: Compute the company’s return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. (Round your intermediate calculations and final answer to 2 decimal places.) Margin not attempted % Turnover not attempted ROI not attempted % Required 2: Using Lean Production, the company is able to reduce the average level of inventory by $96,000. (The released funds are used to pay off short-term creditors.) (Round your intermediate calculations and final answers to 2 decimal places.) Effect Margin % Turnover ROI % Required 3: The company achieves a cost savings of $14,000 per year by using less costly materials. (Round your intermediate calculations and final answers to 2 decimal places.) Effect Margin % Turnover ROI % Required 4: The company issues bonds and uses the proceeds to purchase machinery and equipment that increases average operating assets by $124,000. Interest on the bonds is $15,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $8,000 per year. (Do not round intermediate calculations and round your final answers to 2 decimal places.) Effect Margin % Turnover ROI % Required 5: As a result of a more intense effort by sales people, sales are increased by 15%; operating assets remain unchanged. (Round your intermediate calculations and final answers to 2 decimal places.) Effect Margin % Turnover ROI % Required 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. (Round your intermediate calculations and final answers to 2 decimal places.) Effect Margin % Turnover ROI % Required 7: At the beginning of the year, the company uses $176,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock. (Round your intermediate calculations and final answers to 2 decimal places.) Effect Margin % Turnover ROI %

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter9: Metric-analysis Of Financial Statements

Section: Chapter Questions

Problem 9.2.2P

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Question

100%

CH11_HW_QA3_PIR

Required 1:

Compute the company’s return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. (Round your intermediate calculations and final answer to 2 decimal places.)


Margin	not attempted	%
Turnover	not attempted
ROI	not attempted	%

Required 2:

Using Lean Production, the company is able to reduce the average level of inventory by $96,000. (The released funds are used to pay off short-term creditors.) (Round your intermediate calculations and final answers to 2 decimal places.)

		Effect
Margin	%
Turnover
ROI	%

Required 3:

The company achieves a cost savings of $14,000 per year by using less costly materials. (Round your intermediate calculations and final answers to 2 decimal places.)

		Effect
Margin	%
Turnover
ROI	%

Required 4:

The company issues bonds and uses the proceeds to purchase machinery and equipment that increases average operating assets by $124,000. Interest on the bonds is $15,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $8,000 per year. (Do not round intermediate calculations and round your final answers to 2 decimal places.)

		Effect
Margin	%
Turnover
ROI	%

Required 5:

As a result of a more intense effort by sales people, sales are increased by 15%; operating assets remain unchanged. (Round your intermediate calculations and final answers to 2 decimal places.)

		Effect
Margin	%
Turnover
ROI	%

Required 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. (Round your intermediate calculations and final answers to 2 decimal places.)

		Effect
Margin	%
Turnover
ROI	%

Required 7:

At the beginning of the year, the company uses $176,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock. (Round your intermediate calculations and final answers to 2 decimal places.)

		Effect
Margin	%
Turnover
ROI	%

The contribution format income statement for Huerra Company for last year is given below:
Total
$ 1,000,000
600,000
Unit
$ 50.00
Sales
Variable expenses
Contribution margin
Fixed expenses
30.00
400,000
320,000
20.00
16.00
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 $498,000 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 ROl in (1) above.
2. Using Lean Production, the company is able to reduce the average level of inventory by $96,000. (The released funds are used to
pay off short-term creditors.)
3. The company achieves a cost savings of $14,000 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 $124,000. Interest on the bonds is $15,000 per year. Sales remain unchanged. The new, more efficient equipment reduces
production costs by $8,000 per year.
5. As a result of a more intense effort by sales people, 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 $176,000 of cash (received on accounts receivable) to repurchase and retire some
of its common stock.

Expert Solution

Step 1

1) Margin = Net operating income / sales

= $80000/$1000000 x 100

= 8%

Turnover = Sales / Average operating assets

= $ 1000000 /$498000

= 2.00times

ROI = Margin x turnover

= 8% x 2 = 16%

2). If company reduces the average level of inventory by $96000 , average operating assets of the company will also reduced by $96000 so the new average operating assets

=$498000- $96000

=$402000

Margin = Net operating income / sales

= $80000/$1000000 x 100

= 8%

Turnover = Sales / Average operating assets

= $1000000 / $402000

=2.48 times

ROI = Margin x turnover

= 8% x 2.48 = 19.84 %

Margin	8%	%	Unchanged
Turnover	2.48		Increase
ROI	19.84	%	Increase

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