Question
Westerville Company reported the following results from last years operations: Sales $ 1,800,000 Variable expenses 740,000 Contribution margin 1,060,000 Fixed expenses 700,000 Net operating income
Westerville Company reported the following results from last years operations: |
Sales | $ | 1,800,000 |
Variable expenses | 740,000 | |
Contribution margin | 1,060,000 | |
Fixed expenses | 700,000 | |
Net operating income | $ | 360,000 |
Average operating assets | $ | 1,200,000 |
This year, the company has a $400,000 investment opportunity with the following cost and revenue characteristics: |
Sales | $ | 600,000 | |
Contribution margin ratio | 60 | % of sales | |
Fixed expenses | $ | 288,000 | |
The companys minimum required rate of return is 10%.
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 or NO b. Would the owners of the company want her to pursue the investment opportunity? YES or NO 13. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year? Residual income $_____ 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 or 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 or NO b. Would the owners of the company want her to pursue the investment opportunity? YES or NO
|
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started