Reference no: EM132587792

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:

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

Question 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.) (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 achieves a savings of $11 per unit by using cheaper materials. (Round intermediate and final answer to 2 decimal places.)

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. (Round intermediate and final answer to 2 decimal places.)

d. As a result of a more intense effort by the sales staff, sales are increased by 25%; operating assets remain unchanged. (Round intermediate and final answer to 2 decimal places.)

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. (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).)

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. (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).)

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