Reference no: EM132514341

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

                                          Total                           Unit

Sales                            $28,900,000           $289.00

Less: Variable expenses      17,340,000            173.40

Contribution margin             11,560,000            115.60

Less: Fixed expense              5,780,000           57.80

Net operating income             5,780,000             57.80

Less: Income taxes @ 30%               1,734,000            17.34

Net income                          $4,046,000                  $40.46

• The company had average operating assets of $17,000,000 during the year.

Question 1. 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. Obsolete items of inventory carried on the records at a cost of $100,000 are scrapped and sold for 10% of the book value. (Use full amount of scrap while calculating average operating assets. Round intermediate calculation to 2 decimal places. Enter your percentage answer rounded to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

b. The company uses $300,000 in cash (received on accounts receivable) to repurchase and retire some of its common shares. The net effect of this transaction is a $300,000 change in average operating assets. (Use full amount of scrap while calculating average operating assets. Round intermediate calculation to 2 decimal places. Enter your percentage answer rounded to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)