Westerville Company reported the following results from last years operations:

Sales	$	1,750,000
Variable expenses		520,000
Contribution margin		1,230,000
Fixed expenses		880,000
Net operating income	$	350,000
Average operating assets	$	875,000

At the beginning of this year, the company has a $200,000 investment opportunity with the following cost and revenue characteristics:

Sales	$	320,000
Contribution margin ratio		60	% of sales
Fixed expenses	$	128,000

The companys minimum required rate of return is 20%.

1.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?

Yes

No

1-b. Would the owners of the company want her to pursue the investment opportunity?

Yes

No

2. What is last years residual income?

3.

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

4. 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?

Yes

No

4-b. Would the owners of the company want her to pursue the investment opportunity?

Yes

No