Problem 11-24 (Algo) Return on Investment (ROI) Analysis [LO11-1]

Last years contribution format income statement for Huerra Company is given below:

	Total	Unit
Sales	$ 1,008,000	$ 50.40
Variable expenses	604,800	30.24
Contribution margin	403,200	20.16
Fixed expenses	323,200	16.16
Net operating income	80,000	4.00
Income taxes @ 40%	32,000	1.60
Net income	$ 48,000	$ 2.40

The company had average operating assets of $508,000 during the year.

Required:

1. Compute last years margin, turnover, and return on investment (ROI).

For each of the following questions, indicate whether last years margin and turnover will increase, decrease, or remain unchanged as a result of the events described, and then compute the new ROI. Consider each question separately.

1. Using Lean Production, the company is able to reduce the average level of inventory by $94,000.
2. The company achieves a cost savings of $8,000 per year by using less costly materials.
3. The company purchases machinery and equipment that increase average operating assets by $129,000. Sales remain unchanged. The new, more efficient equipment reduces production costs by $4,000 per year.
4. As a result of a more intense effort by sales people, sales are increased by 10%; operating assets remain unchanged.
5. At the beginning of the year, obsolete inventory is scrapped, thereby lowering net operating income by $17,000.
6. At the beginning of the year, the company uses $177,000 of cash (received on accounts receivable) to repurchase some of its common stock.
7. At the beginning of the year, the company uses $177,000 of cash (received on accounts receivable) to repurchase some of its common stock.