Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Top of Form [The following information applies to the questions displayed below.] Westerville Company reported the following results from last years operations: Sales $ 2,000,000

Top of Form

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

Westerville Company reported the following results from last years operations:

Sales

$

2,000,000

Variable expenses

640,000

Contribution margin

1,360,000

Fixed expenses

860,000

Net operating income

$

500,000

Average operating assets

$

1,250,000

This year, the company has a $250,000 investment opportunity with the following cost and revenue characteristics:

Sales

$

400,000

Contribution margin ratio

70

% of sales

Fixed expenses

$

220,000

The companys minimum required rate of return is 10%.

5.

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

6.

What is the ROI related to this years investment opportunity?

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))

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.)

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 .1234 should be entered as 12.3))

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?

No

Yes

10-b.

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

No

Yes

11.

What is last years residual income?

12.

What is the residual income of this years investment opportunity?

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?

No

Yes

15-a.

Assume that the contribution margin ratio of the investment opportunity was 60% instead of 70%. 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?

Yes

No

15-b.

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

No

Yes

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Contemporary Labor Economics

Authors: Campbell McConnell, Stanley Brue, David Macpherson

9th Edition

0073375950, 9780073375953

More Books

Students also viewed these Accounting questions