Westerville Company reported the following results from last years operations: Sales $ 1,200,000 Variable expenses 420,000 Contribution margin 780,000 Fixed expenses 600,000 Net operating income $ 180,000 Average operating assets $ 600,000 ________________________________________ At the beginning of this year, the company has a $137,500 investment opportunity with the following cost and revenue characteristics: Sales $ 220,000 Contribution margin ratio 60 % of sales Fixed expenses $ 99,000 The companys minimum required rate of return is 20%.

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?

Yes

• No

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

• Yes
• No

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 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

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

• Yes
• No