The contribution format income statement for Strickland, Inc., for its most recent period is given below:
|
Total |
Unit |
| Sales |
$ |
990,000 |
$ |
49.50 |
| Variable expenses |
|
594,000 |
|
29.70 |
| |
|
|
|
|
| Contribution margin |
|
396,000 |
|
19.80 |
| Fixed expenses |
|
318,000 |
|
15.90 |
| |
|
|
|
|
| Net operating income |
|
78,000 |
|
3.90 |
| Income taxes @ 40% |
|
31,200 |
|
1.56 |
| |
|
|
|
|
| Net income |
$ |
46,800 |
$ |
2.34 |
| |
|
|
|
|
|
|
The company had average operating assets of $503,000 during the period.
|
| Required: |
| 1. |
Compute the company's return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. (Round your intermediate calculations and final answer to 2 decimal places.)
|
|
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 original ROI computed in (1) above.
|
| 2. |
The company achieves a cost savings of $6,000 per period by using less costly materials. (Round your intermediate calculations and final answers to 2 decimal places.)
|
|
|
Effect |
| Margin |
% |
(Click to select)UnchangedIncreaseDecrease |
| Turnover |
|
(Click to select)UnchangedDecreaseIncrease |
| ROI |
% |
(Click to select)UnchangedIncreaseDecrease |
|
| 3. |
Using Lean Production, the company is able to reduce the average level of inventory by $91,000. (The released funds are used to pay off bank loans.) (Round your intermediate calculations and final answers to 2 decimal places.)
|
|
|
Effect |
| Margin |
% |
(Click to select)IncreaseUnchangedDecrease |
| Turnover |
|
(Click to select)IncreaseDecreaseUnchanged |
| ROI |
% |
(Click to select)UnchangedDecreaseIncrease |
|
| 4. |
Sales are increased by $198,000; operating assets remain unchanged. (Round your intermediate calculations and final answers to 2 decimal places.)
|
|
|
Effect |
| Margin |
% |
(Click to select)DecreaseUnchangedIncrease |
| Turnover |
|
(Click to select)IncreaseUnchangedDecrease |
| ROI |
% |
(Click to select)UnchangedDecreaseIncrease |
|
| 5. |
The company issues bonds and uses the proceeds to purchase $128,000 in machinery and equipment at the beginning of the period. Interest on the bonds is $14,000 per period. Sales remain unchanged. The new, more efficient equipment reduces production costs by $5,000 per period. (Round your intermediate calculations and final answers to 2 decimal places.)
|
|
|
Effect |
| Margin |
% |
(Click to select)IncreaseUnchangedDecrease |
| Turnover |
|
(Click to select)UnchangedDecreaseIncrease |
| ROI |
% |
(Click to select)IncreaseDecreaseUnchanged |
|
| 6. |
The company invests $182,000 of cash (received on accounts receivable) in a plot of land that is to be held for possible future use as a plant site. (Round your intermediate calculations and final answers to 2 decimal places.) |
|
|
Effect |
| Margin |
% |
(Click to select)IncreaseDecreaseUnchanged |
| Turnover |
|
(Click to select)IncreaseDecreaseUnchanged |
| ROI |
% |
(Click to select)UnchangedIncreaseDecrease |
|
| 7. |
Obsolete inventory carried on the books at a cost of $17,000 is scrapped and written off as a loss.(Round your intermediate calculations and final answers to 2 decimal places.)
|
|
|
Effect |
| Margin |
% |
(Click to select)DecreaseUnchangedIncrease |
| Turnover |
|
(Click to select)UnchangedDecreaseIncrease |
| ROI |
% |
(Click to select)DecreaseUnchangedIncrease |