Question
Required information The Foundational 15 [LO10-1, LO10-2] [The following information applies to the questions displayed below.] Westerville Company reported the following results from last years
Required information
The Foundational 15 [LO10-1, LO10-2]
[The following information applies to the questions displayed below.]
Westerville Company reported the following results from last years operations:
Sales | $ | 1,000,000 |
Variable expenses | 300,000 | |
Contribution margin | 700,000 | |
Fixed expenses | 500,000 | |
Net operating income | $ | 200,000 |
Average operating assets | $ | 625,000 |
At the beginning of this year, the company has a $120,000 investment opportunity with the following cost and revenue characteristics:
Sales | $ | 200,000 | |
Contribution margin ratio | 60 | % of sales | |
Fixed expenses | $ | 90,000 | |
The companys minimum required rate of return is 15%.
Foundational 10-13
13. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?
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?
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Yes
-
No
15-a. Assume that the contribution margin ratio of the investment opportunity was 50% instead of 60%. 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?
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Yes
-
No
15-b. Would the owners of the company want her to pursue the investment opportunity?
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Yes
-
No
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