Obsolete inventory carried on the books at a cost of 17000

Reference no: EM13569004

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.)

ROI

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)DecreaseIncreaseUnchanged
Turnover		(Click to select)DecreaseIncreaseUnchanged
ROI	%	(Click to select)IncreaseUnchangedDecrease

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)IncreaseDecreaseUnchanged
Turnover		(Click to select)IncreaseUnchangedDecrease
ROI	%	(Click to select)UnchangedIncreaseDecrease

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)UnchangedIncreaseDecrease
Turnover		(Click to select)UnchangedIncreaseDecrease
ROI	%	(Click to select)DecreaseIncreaseUnchanged

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)UnchangedIncreaseDecrease
Turnover		(Click to select)DecreaseIncreaseUnchanged
ROI	%	(Click to select)UnchangedDecreaseIncrease

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)DecreaseIncreaseUnchanged
Turnover		(Click to select)UnchangedDecreaseIncrease
ROI	%	(Click to select)UnchangedDecreaseIncrease

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)UnchangedDecreaseIncrease
Turnover		(Click to select)IncreaseDecreaseUnchanged
ROI	%	(Click to select)UnchangedIncreaseDecrease

Reference no: EM13569004

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