Reference no: EM132755217

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

Total Unit

Sales $11,400,000 $228.00

Less: Variable expenses 7,980,000 159.60

Contribution margin 3,420,000 68.40

Less: Fixed expense 1,710,000 34.20

Net operating income 1,710,000 34.20

Less: Income taxes @ 30% 513,000 10.26

Net income $1,197,000 $23.94

The company had average operating assets of $6,000,000 during the year.

Required -

1. Compute the company's ROI for the period using the ROI formula stated in terms of margin and turnover.

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.)

b. The company achieves a savings of $11 per unit by using cheaper materials.

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.

d. As a result of a more intense effort by the sales staff, sales are increased by 25%; operating assets remain unchanged.

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.

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.

g. The company pays a cash dividend to its shareholders, which results in a $300,000 change in average operating assets.