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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

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%.

1. What is last years margin?

2. What is last years turnover? (Round your answer to 1 decimal place.

3. What is last years return on investment (ROI)? (Round your intermediate calculations to 1 decimal place.)

4. What is the margin related to this years investment opportunity?

5. What is the turnover related to this years investment opportunity? (Round your answer to 1 decimal place.)

6. What is the ROI related to this years investment opportunity? (Do not round intermediate calculations.)

7. If the company pursues the investment opportunity and otherwise performs the same as last year, what margin will it earn this year? (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

8. If the company pursues the investment opportunity and otherwise performs the same as last year, what turnover will it earn this year? (Round your answer to 2 decimal places.)

9. If the company pursues the investment opportunity and otherwise performs the same as last year, what ROI will it earn this year? (Do not round intermediate calculations. Round your percentage answer to 1 decimal place (i.e., 0.1234 should be considered as 12.3).)

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

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