ROI, Margin, Turnover and Residual Income

Louisville 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

new

$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 rate of return is 15%.

INSTRUCTIONS:

1) What is last years margin?

2) What is last years turnover?

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

4) What is the companys residual income for last year?

5

) What is the margin related to this

years new investment opportunity?

(Hint: Using the new

opportunity information, set up an income statement similar to last years statement

and then

calculate the margin

.)

6

) What is the turnover related to this years new investment opportunity?

7

)

What is the ROI related to this years investment opportunity?

8) What is the residual income of this years new investment opportunity?

9

) If the company pursues the new investment opportunity and otherwise performs the same as

last year, what ROI will it earn this year?

10) Should the company accept the new investment opportunity? Explain.