Westerville Company reported the following results from last years operations:

Sales	$	1,800,000
Variable expenses		435,000
Contribution margin		1,365,000
Fixed expenses		1,005,000
Net operating income	$	360,000
Average operating assets	$	1,200,000

At the beginning of this year, the company has a $300,000 investment opportunity with the following cost and revenue characteristics:

Sales	$	360,000
Contribution margin ratio		70	% of sales
Fixed expenses	$	216,000

The companys minimum required rate of return is 10%.

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?

• Yes

• No

15-a. Assume that the contribution margin ratio of the investment opportunity was 65% 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?

• Yes

• No