Question
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: |
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Sales | $ | 2,000,000 |
Variable expenses |
| 640,000 |
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Contribution margin |
| 1,360,000 |
Fixed expenses |
| 860,000 |
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Net operating income | $ | 500,000 |
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Average operating assets | $ | 1,250,000 |
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This year, the company has a $250,000 investment opportunity with the following cost and revenue characteristics: |
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Sales | $ | 400,000 |
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Contribution margin ratio |
| 70 | % of sales |
Fixed expenses | $ | 220,000 |
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The companys minimum required rate of return is 10%. | |
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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? | ||||
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10-b. | Would the owners of the company want her to pursue the investment opportunity? | ||||
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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? | ||||
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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? | ||||
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15-b. | Would the owners of the company want her to pursue the investment opportunity? | ||||
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