Chapter 11 Homework

Foundational [LO11-1, LO11-2]

[The following information applies to the questions displayed below.]

Westerville Company reported the following results from last years operations:

Sales	$	1,400,000
Variable expenses		680,000
Contribution margin		720,000
Fixed expenses		440,000
Net operating income	$	280,000
Average operating assets	$	875,000

This year, the company has a $300,000 investment opportunity with the following cost and revenue characteristics:

Sales	$	480,000
Contribution margin ratio		80	% of sales
Fixed expenses	$	336,000

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Required:

1.	What is last years margin?

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2.	What is last years turnover? (Round your answer to 1 decimal place.)

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3.	What is last years return on investment (ROI)?

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4.	What is the margin related to this years investment opportunity?

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5.	What is the turnover related to this years investment opportunity? (Round your answer to 1 decimal place.)

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6.	What is the ROI related to this years investment opportunity?

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7.	If the company pursues the investment opportunity and otherwise performs the same as last year, what margin will it earn this year? (Round your percentage answer to 1 decimal place (i.e .1234 should be entered as 12.3))

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8.	If the company pursues the investment opportunity and otherwise performs the same as last year, what turnover will it earn this year? (Round your answer to 2 decimal places.)

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9.	If the company pursues the investment opportunity and otherwise performs the same as last year, what ROI will it earn this year? (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be considered as 12.3%.))

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10-a.

If Westervilles chief executive officer will earn a bonus only if her ROI from this year exceeds her ROI from last year, would she pursue the investment opportunity?

	Yes
	No

10-b.

Would the owners of the company want her to pursue the investment opportunity?

	Yes
	No

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11.	What is last years residual income?

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12.	What is the residual income of this years investment opportunity?

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13.	If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?

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14.

If Westervilles chief executive officer will earn a bonus only if her residual income from this year exceeds her residual income from last year, would she pursue the investment opportunity?

	No
	Yes

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15-a.

Assume that the contribution margin ratio of the investment opportunity was 75% instead of 80%. If Westervilles Chief Executive Officer will earn a bonus only if her residual income from this year exceeds her residual income from last year, would she pursue the investment opportunity?

	No
	Yes

15-b.

Would the owners of the company want her to pursue the investment opportunity?

	Yes
	No