Kamir Lumber is facing stiff competition from imported goods. Its operating income margin has been declining steadily
Question:
For the coming year, Kamir's president plans to install a JIT purchasing and manufacturing system. She estimates that inventories will be reduced by 70 percent during the first year of operations, producing a 20 percent reduction in the average operating assets of the company, which would remain unchanged without the JIT system. She also estimates that sales and operating income will be restored to year 1 levels because of simultaneous reductions in per-unit operating expenses and selling prices. Lower selling prices will allow Kamir to expand its market share.
Required:
1. Compute the ROI, margin, and turnover for years 1, 2, and 3.
2. Suppose that in year 4 the sales and operating income were achieved as expected, but inventories remained at the same level as in year 3. Compute the expected ROI, margin, and turnover. Explain why the ROI increased over the year 3 level.
3. Suppose that the sales and net operating income for year 4 remained the same as in year 3 but inventory reductions were achieved as projected. Compute the ROI, margin, and turnover. Explain why the ROI exceeded the year 3 level.
4. Assume that all expectations for year 4 were realized. Compute the expected ROI, margin, and turnover. Explain why the ROI increased over the year 3 level.
Step by Step Answer:
Cornerstones of Managerial Accounting
ISBN: 978-0176530884
2nd Canadian edition
Authors: Maryanne M. Mowen, Don Hanson, Dan L. Heitger, David McConomy, Jeffrey Pittman