The statement of profit or loss for Huerra Company for last year is given below: The company had average operating
The statement of profit or loss for Huerra Company for last year is given below:
The company had average operating assets of £2,000,000 during the year.
1. Compute the company’s 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 Requirement 1 above.
2. By use of just-in-time (JIT), 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 saving of £32,000 per year by using less costly materials.
4. The company issues bonds and uses the proceeds to purchase £500,000 in machinery and equipment. Interest on the bonds is £60,000 per year. Revenue remain unchanged. The new, more efficient equipment reduces production costs by £20,000 per year.
5. As a result of a more intense effort by salespeople, revenue are increased by 20%; operating assets remain unchanged.
6 Obsolete items of inventory carried on the records at a cost of £40,000 are scrapped and written off as a loss since they are unsaleable.
7 The company uses £200,000 of cash (received on accounts receivable) to repurchase and retire some of its common inventory.
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