contribution margin less

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Unformatted text preview: ............ Contribution margin.................................. Less fixed expenses: Fixed overhead .................................... Fixed administrative ............................ Net income ................................................. $ 132,000 $45,760 13,200 $27,900 23,000 58,960 $ 73,040 50,900 $ 22,140 Variable costing should be used, since the fixed costs will not increase as production and sales increase. 10–6 1. Operating income = Sales – Expenses = $50,000 − $48,000 = $2,000 2. Margin = Operating income/Sales = $2,000/$50,000 = 0.04 Turnover = Sales/Operating assets = $50,000/$10,000 = 5 3. ROI = Margin × Turnover = 0.04 × 5 = 0.20, or 20% 10–7 1. Average operating assets = ($78,650 + $81,350)/2 = $80,000 2. Margin = Operating income/Sales = $7,200/$240,000 = 0.03 Turnover = Sales/Operating assets = $240,000/$80,000 = 3.0 ROI = Margin × Turnover = 0.03 × 3.0 = 0.09, or 9.0% 10–8 1. a. ROI of division without radio = $480,000/$8,000,000 = 0.06 b. ROI of the radio project = $270,000/$1,500,000 = 0.18 c. ROI of division with radio = $750,000/$9,500,000 = 0.0789 2. Yes, Cheryl will decide to invest in the project, since overall division ROI will increase. 326 10–9 1. After-tax cost of mortgage bonds = (1 – 0.3)(0.08) = 0.056 2. Cost of common stock = 0.06 + 0.06 = 0.12 3. Mortgage bonds Common stock Total Dollar Amount $1,300,000 700,000 $2,000,000 Percent 0.65 0.35 After-Tax × Cost = 0.056 0.120 Weighted average cost of capital Weighted Cost 0.0364 0.0420 0.0784 4. Cost of capital = $1,500,000 × 0.0784 = $117,600 5. After-tax operating income Less: Cost of capital EVA $115,000 117,600 $ (2,600) Because EVA is negative, Schipper is destroying wealth. 10–10 1. After-tax cost of mortgage bonds = (1 – 0.4)(0.08) = 0.048 2. Cost of common stock = 0.06 + 0.06 = 0.12 3. Mortgage bonds Common stock Total Dollar Amount $1,300,000 700,000 $2,000,000 Percent 0.65 0.35 After-Tax × Cost = 0.048 0.120 Weighted average cost of capital Weighted Cost 0.0312 0.0420 0.0732 4....
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