Required: 1. Compute the ROI, margin, and turnover for Years 1, 2, and 3.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Ready Electronics is facing stiff competition from imported goods. Its operating income margin has been declining steadily for the past several years. The company has been forced to lower prices so that it can maintain its market share. The operating results for the past 3 years are as follows:
| Year 1 | Year 2 | Year 3 | |
| Sales | $12,000,000 | $ 9,500,000 | $ 9,000,000 |
| Operating income | 1,200,000 | 1,195,000 | 945,000 |
| Average assets | 15,000,000 | 15,000,000 | 17,750,000 |
For the coming year, Ready's president plans to install a JIT purchasing and manufacturing system. She estimates that inventories will be reduced by 70% during the first year of operations, producing a 20% reduction in the average operating assets of the company, which would remain unchanged without the JIT system. She also estimates that sales and operating income will be restored to Year 1 levels because of simultaneous reductions in operating expenses and selling prices. Lower selling prices will allow Ready to expand its market share.
(Note: Round all numbers to two decimal places.)
Required:
1. Compute the ROI, margin, and turnover for Years 1, 2, and 3.
| Year 1 | Year 2 | Year 3 | |
| ROI | % | % | % |
| Margin | % | % | % |
| Turnover |
2. Conceptual Connection: Suppose that in Year 4 the sales and operating income were achieved as expected, but inventories remained at the same level as in Year 3. Compute the expected ROI, margin, and turnover.
| ROI | % | |
| Margin | % | |
| Turnover |
Why did the ROI increase over the Year 3 level?
3. Conceptual Connection: Suppose that the sales and net operating income for Year 4 remained the same as in Year 3 but inventory reductions were achieved as projected. Compute the ROI, margin, and turnover.
| ROI | % |
| Margin | % |
| Turnover |
Why did the ROI exceed the Year 3 level?
4. Conceptual Connection: Assume that all expectations for Year 4 were realized. Compute the expected ROI, margin, and turnover.
| ROI | % |
| Margin | % |
| Turnover |
Why did the ROI increase over the Year 3 level?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 3 images
