# PROBLEM 1120 Return on Investment Analysis [LO3] The contribution format income statement for… 1 answer below »

PROBLEM 11–20 Return on Investment Analysis [LO3]

The contribution format income statement for Smith & Company for its most recent period is given below:

Total

Unit

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

\$500,000

\$50.00

Less variable expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

300,000

30.00

Contribution margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

200,000

20.00

Less fixed expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

160,000

Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

40,000

Less income taxes at 40%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16,000

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

\$ 24,000

The company had average operating assets of \$250,000 during the period.

Required:

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 original ROI computed in (1) above.

2.               The company achieves cost savings of \$10,000 per period by using less costly materials.

3.               Using lean production, the company is able to reduce the average level of inventory by

\$50,000. (The released funds are used to pay off bank loans.)

4.               Sales are increased by \$50,000; operating assets remain unchanged.

5.               The company issues bonds and uses the proceeds to purchase \$75,000 in machinery and equipment at the beginning of the period. Interest on the bonds is \$2,000 per period. Sales remain unchanged. The new, more efficient equipment reduces production costs by \$4,000 per period.

6.               The company invests \$50,000 in cash (received on accounts receivable) in a plot of land that is to be held for possible future use as a plant site.

7.               Obsolete inventory carried on the books at a cost of \$5,000 is scrapped and written off as a loss.