Westerville Company reported the following results from last years operations:

Sales	$ 1,200,000
Variable expenses	320,000
Contribution margin	880,000
Fixed expenses	640,000
Net operating income	$ 240,000
Average operating assets	$ 600,000

At the beginning of this year, the company has a $150,000 investment opportunity with the following cost and revenue characteristics:

Sales	$ 240,000
Contribution margin ratio	50	% of sales
Fixed expenses	$ 84,000

The companys minimum required rate of return is 15%.

1. What is last years margin?

2. What is last years turnover?

3. What is last years return on investment (ROI)?

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

5. What is the turnover related to this years investment opportunity?

6. What is the ROI related to this years investment opportunity?

7. If the company pursues the investment opportunity and otherwise performs the same as last year, what margin will it earn this year?

8. If the company pursues the investment opportunity and otherwise performs the same as last year, what turnover will it earn this year?

9. If the company pursues the investment opportunity and otherwise performs the same as last year, what ROI will it earn this year?

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?

multiple choice 1

Yes

No 10-b. Would the owners of the company want her to pursue the investment opportunity?

multiple choice 2

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?

multiple choice

Yes

No

15-a. Assume that the contribution margin ratio of the investment opportunity was 40% instead of 50%. 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?

multiple choice 1

Yes

No

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

multiple choice 2

Yes

No