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# 1

Sales
Variable expenses
Contribution margin
Fixed expenses
Net operating income

Sales
Net operating income
Average operating assets

## ROI (net operating income/ave.

operating assets)
Using DuPont formula:
Margin(net operating income/sales)
Turnover(sales/ave. operating assets)
ROI (margin*turnover)

Current
10,000,000.00
6,000,000
4,000,000
3,200,000
800,000 \$

New
2,000,000
1,200,000
800,000
640,000
160,000

10,000,000 \$
800,000
4,000,000

2,000,000
160,000
1,000,000

20.0%

16.0%

8.0%
2.5
20.0%

8.0%
2.0
16.0%

2 Based on the computed ROI, I will reject the new product line because accepting it will result to
overall ROI of the company.

3 I suppose that headquarters is anxious for the Office Product Division to add the new product line
company had an overall ROI of 15% last year while the new product line has a 16% ROI but their
20% will decrease because of this.
4a

4b

## Average operating assets

Net operating income
Minimum required return (net operating
income*15%)
Residual Income

\$
\$

4,000,000 \$
800,000 \$
480,000
320,000

1,000,000
160,000
120,000
40,000

I will accept the new product line because it will increase the residual income by \$40,000. Moreo
shows that the net operating income is above the minimum required return.

\$
\$

Overall
12,000,000
7,200,000
4,800,000
3,840,000
960,000
12,000,000
960,000
5,000,000

19.2%

8.0%
2.4
19.2%

## d the new product line because the

s a 16% ROI but their current ROI of

\$
\$

5,000,000
960,000

600,000
360,000

## me by \$40,000. Moreover, it clearly

n.

Sales
Variable expenses
Contribution margin
Fixed expenses
Net operating income before taxes
Income taxes @30%
Net operating income

Total
4,000,000
2,800,000
1,200,000
840,000
360,000
108,000
252,000

Sales
Net operating income
Average operating assets

4,000,000
360,000
2,000,000

Unit
80.00
56.00
24.00
16.80
7.20
2.16
5.04

## Using DuPont formula:

Margin(net operating income/sales)
Turnover(sales/ave. operating assets)
ROI (margin*turnover)

9.0%
2.0
18.0%

## 2 Decrease in the average level of inventory by \$400,000

Sales
4,000,000
Net operating income
360,000
Average operating assets
1,600,000
Using DuPont formula:
Margin(net operating income/sales)
Turnover(sales/ave. operating assets)
ROI (margin*turnover)
3 Cost savings of \$32,000
Sales
Net operating income
Average operating assets
Using DuPont formula:
Margin(net operating income/sales)
Turnover(sales/ave. operating assets)
ROI (margin*turnover)

9.0% unchanged
2.5 increase
22.5% increase

4,000,000
392,000
2,000,000

9.8% increase
2.0 unchanged
19.6% increase

4 Purchased machinery and equipment worth \$500,000 and decrease in production costs of \$20,0
Sales
4,000,000
Net operating income
380,000
Average operating assets
2,500,000
Using DuPont formula:

## Margin(net operating income/sales)

Turnover(sales/ave. operating assets)
ROI (margin*turnover)
5 Increase in sales by 20%
Units (\$4,800,00/\$80.00)
Sales
Net operating income
(60,000*\$24.00)-\$840,000
Average operating assets
Using DuPont formula:
Margin(net operating income/sales)
Turnover(sales/ave. operating assets)
ROI (margin*turnover)

9.5% increase
1.6 decrease
15.2% decrease

60,000
4,800,000
600,000
2,000,000

12.5% increase
2.4 increase
30.0% increase

## 6 Scrapped obsolete inventory at \$40,000 and written off as a loss

Sales
4,000,000
Net operating income
320,000
Average operating assets
1,960,000
Using DuPont formula:
Margin(net operating income/sales)
Turnover(sales/ave. operating assets)
ROI (margin*turnover)
7 Used \$200,000 cash to repurchase and retire
Sales
Net operating income
Average operating assets
Using DuPont formula:
Margin(net operating income/sales)
Turnover(sales/ave. operating assets)
ROI (margin*turnover)

8.0% decrease
2.04 increase
16.3% decrease

4,000,000
360,000
1,800,000

9.0% unchanged
2.2 increase
20.0% increase