Module 5 Case 4 The contribution format income statement for Huerra Company for last year is given below: Total Unit $80.00 56.00 Sales Variable expenses Contribution margin Fixed expenses Net operating income Income taxes @ 30% Net operating income $4,000,000 2,800,000 1,200,000 840,000 360,000 108,000 $ 252,000 24.00 16.80 7.20 2.16 $ 5.04 The company had average operating assets of $2,000,000 during the year. Required: 1. Compute the company's return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. When computing ROI, use Income before taxes. 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. Consider each question separately (independently), starting in each case from the data used to compute the original ROI in (1) above. 2. Using Lean Production, the company is able to reduce the average level of inventory by $400,000. Sales and profits will remain the same. (The released funds are used to pay off short-term creditors.) 3. The company achieves a cost savings of $32,000 per year by using less costly materials (no effect on inventory levels in $$). 4. The company reduces fixed expenses by 10% by cutting advertising. This results in a 10% reduction in sales. Assets remain unchanged. 5. After spending $50,000 on training of salespeople, sales are increased by 20%; operating assets remain unchanged. 6. Obsolete inventory carried on the books at a cost of $60,000 is scrapped and written off as a loss. 7. The company borrows $200,000 from the bank and invests in more efficient equipment; as a result, overall sales do not change, but variable expenses decrease by 10%. ANSWER 1. Margin = Turnover = ROI = 2. For 2 through 7, just state if Margin will increase (1), Decrease (D), or remain the same (NA), Turnover will I, D, or NA. HINT: carry to the nearest 2 decimals of a %; may need to plug in numbers if both numerator and denominator move in the same direction (i.e.numerator or denominator both increase or both decrease). Margin = Turnover = Margin = 3. Turnover = Margin = 4. Turnover = Margin = 5. Turnover = Margin = 6. Turnover = Margin = 7. Turnover =