The contribution format income statement for Huerra Company forlast year is given below:

	Total		Unit
Sales	$	996,000	$	49.80
Variable expenses		597,600		29.88
Contribution margin		398,400		19.92
Fixed expenses		316,400		15.82
Net operating income		82,000		4.10
Income taxes @ 40%		32,800		1.64
Net income	$	49,200	$	2.46

The company had average operating assets of $493,000 during theyear.

Required:

1. Compute the company’s return on investment (ROI) for theperiod using the ROI formula stated in terms of margin andturnover.

Margin 4.94 % Turnover 197.62 ROI 9.76 %

For each of the following questions, indicate whether the marginand turnover will increase, decrease, or remain unchanged as aresult of the events described, and then compute the new ROIfigure. Consider each question separately, starting in each casefrom the data used to compute the original ROI in (1) above.

2. Using Lean Production, the company is able to reduce theaverage level of inventory by $91,000. (The released funds are usedto pay off short-term creditors.)

	Effect Margin 4.94 % Unchanged Turnover 244.72 Increase ROI 12.09 % Increase

3. The company achieves a cost savings of $11,000 per year byusing less costly materials.

	Effect Margin 6.24 % Increase Turnover 197.62 Decrease ROI 12.34 % Increase

3a. The company issues bonds and uses the proceeds to purchasemachinery and equipment that increases average operating assets by$126,000. Interest on the bonds is $14,000 per year. Sales remainunchanged. The new, more efficient equipment reduces productioncosts by $4,000 per year.

	Effect Margin 8.94 % Increase Turnover 1.58 Decrease ROI 14.15 % Decrease