Westerville Company reported the following results from last years operations:

Sales	$	1,400,000
Variable expenses		510,000
Contribution margin		890,000
Fixed expenses		610,000
Net operating income	$	280,000
Average operating assets	$	875,000

At the beginning of this year, the company has a $175,000 investment opportunity with the following cost and revenue characteristics:

Sales	$	280,000
Contribution margin ratio		50	% of sales
Fixed expenses	$	98,000

The companys minimum required rate of return is 15%.

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?

multiple choice

• Yes

• No

15-a. Assume that the contribution margin ratio of the investment opportunity was 40% instead of 50%. 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?

multiple choice 1

• Yes

• No