Last Year Ann Arbor Corp Had $155,000 of Assets (Which

question 94

Multiple Choice

Last year Ann Arbor Corp had $155,000 of assets (which equals total invested capital) ,$305,000 of sales,$20,000 of net income,and a debt-to-total-capital ratio of 37.5%.The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000.The firm finances using only debt and common equity.Assets,total invested capital,sales,and the debt to capital ratio would not be affected.By how much would the cost reduction improve the ROE?

• A)11.51%
• B)12.11%
• C)12.75%
• D)13.42%
• E)14.09%

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Definitions:

Absorption Costing

An accounting method that includes all direct costs and allocated overheads in the cost of a product or service, as opposed to variable costing which excludes certain overheads.

Ending Inventory

The total value of goods available for sale at the end of an accounting period or fiscal year.

Variable Costing

An accounting method that only includes variable production costs (direct materials, direct labor, and variable manufacturing overhead) in product costs, excluding fixed manufacturing overhead.

Net Operating Income

The profit realized from a business's operations after subtracting operating expenses from operating revenues.