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Return on Investment

The contribution format income statement for Williamson Inc. for last year is given below:

Total Unit
Sales $8,000,000 $160
Less variable exp. $5,600,000 112
Contribution margin $2,400,000 48
Less fixed expenses $1,600,000 32
Net operating income $800,000 16
Less Income taxes @ 40% $320,000 6.40
Net Income $480,000 9.60

The company had average operating assests of $4,000,000 during the year.

Required
1. Compute the company's reutrn on investment (ROI) for the period using the ROI forumula state 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. Consider each question separately, starting in each case from the date 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 $800,000
3. The company achieves a cost savings of $48,000 per year by using less costly materials.
4. The company issues bonds and uses the proceeds to purchase $1,000,000 in machinery and equipment at the beginning of the period. Interest on the bonds is $120,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $160,000 per year.
5. As a result a more intense effort by salespeople, sales are increased by 10%; operating assets remain unchanged.
6.Obsolete inventory carried on the books at a cost of $80,000 is scrapped and written off as a loss.
7. The company uses $180,000 of cash(received on accounts receivable)to repurchase and retire some of its common stock.

What type of help I am looking for.

I completed the problem but am not sure if I did everything correctly. Can you please complete this problem showing specifically step by step how to complete this return on Investment Analysis.

Solution Preview

1. Compute the company's reutrn on investment (ROI) for the period using the ROI forumula state in terms of margin and turnover.

ROI formula in terms of margin and turnover is
ROI = Margin X Turnover
ROI = Net Operating Income/Sales X Sales/Assets
Margin = Net Operating Income / Sales = 800,000/8,000,000 = 0.1
Turnover = Sales/Assets = 8,000,000/4,000,000 = 2
ROI = 0.1X2 = 20%

2. Using Lean Production, the company is able to reduce the average level of inventory by $800,000

Reduction in inventory would have no impact on margin but would reduce the operating assets by 800,000. The new operating assets would be 4,000,00-800,000 = 3,200,000
Turnover = 8,000,000/3,200,000 = 2.5
ROI = 0.1X2.5 = 25%

3. The company achieves a cost savings of $48,000 per year by using less costly ...

Solution Summary

The solution explains the calculation relating to return on investment

$2.19