The contribution format income statement for Huerra Company for last year is given below: Total Unit Sales $ 4,000,000 $ 80.00 Variable expenses 2,800,000 56.00 Contribution margin 1,200,000 24.00 Fixed expenses 840,000 16.80 Net operating income 360,000 7.20 Income taxes @ 30% 108,000 2.16 Net income $ 252,000 $ 5.04 The company had average operating assets of $2,000,000 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 $400,000. (The released funds are used to pay off short-term creditors.)
The contribution format income statement for Huerra Company for last year is given below:
| Total | Unit | |||
| Sales | $ | 4,000,000 | $ | 80.00 |
| Variable expenses | 2,800,000 | 56.00 | ||
| Contribution margin | 1,200,000 | 24.00 | ||
| Fixed expenses | 840,000 | 16.80 | ||
| Net operating income | 360,000 | 7.20 | ||
| Income taxes @ 30% | 108,000 | 2.16 | ||
| Net income | $ | 252,000 | $ | 5.04 |
The company had average operating assets of $2,000,000 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 $400,000. (The released funds are used to pay off short-term creditors.)
3. The company achieves a cost savings of $32,000 per year by using less costly materials.
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 answers to 2 decimal places.)
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REQUIRED 2
Using Lean Production, the company is able to reduce the average level of inventory by $400,000. (The released funds are used to pay off short-term creditors.) (Round your intermediate calculations and final answers to 2 decimal places.)
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The company achieves a cost savings of $32,000 per year by using less costly materials. (Round your answers to 2 decimal places.)
REQUIRED 3
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