Chapter $11$ Performance Measurement Case Study

The contribution format income statement for Escobedo Company for last year is provided below.

Instructions

Update the prior year contribution income statement for each requirement $($if applicable$)$ and answer questions associated with each scenario.

Consider and analyze each requirement separately by completing blue areas below:

Contribution Income Statement Prior year Requirement $1$ Requirement $2$ Requirement $3$ Requirement $4$

Sales $$3,000,000$

Variable Expenses $2,100,000$

Contribution Margin $900,000$

Fixed expenses $630,000$

Net Operating Income $270,000$

Income Taxes $(30\%)81,000$

Net Income $189,000$

Balance Sheet Data

Average operating assets $1,800,000$

Compute the ROI

Margin $9\mathrm{.}0\%$

Turnover $1\mathrm{.}7$

ROI $15\mathrm{.}0\%$

Required

$1.$ Using Lean Production, the company is able to reduce the average level of inventory by $$200,000$

How ill this reduction in the level of inventory affect ROI calculation?

$2.$ At the beginning of the year, obsolete inventory carried on the books at a cost of $$30,000$ is scrapped and written off as a loss.

Which two account categories of the finanacials are affected?

$3.$ As a result of a more intense effort by the sales department, sales are increased by $20\%$; operating assets remain unchanged.

As part of the management team, provide a suggestion to help incentivize sales personnel:

$4.$ Your only goal is to increase ROI for the current quarter. Your two options are to either invest in the purchase of new machinery that increases average operating assets by $$250,000$ or to use less costly materials to achieve cost savings of $$50,000?$

Use Requirement $4$ template above to help you choose the best option and explain your decision: