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%

epting it will result to a decrease in the

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

production costs of $20,000