Westerville Company reported the following results from last years operations: Sales $ 1,400,000 Variable expenses 680,000 Contribution
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Question:
Westerville Company reported the following results from last year’s operations: |
Sales | $ | 1,400,000 |
Variable expenses | 680,000 | |
Contribution margin | 720,000 | |
Fixed expenses | 440,000 | |
Net operating income | $ | 280,000 |
Average operating assets | $ | 875,000 |
This year, the company has a $300,000 investment opportunity with the following cost and revenue characteristics: |
Sales | $ | 480,000 | |
Contribution margin ratio | 80 | % of sales | |
Fixed expenses | $ | 336,000 | |
The company’s minimum required rate of return is 15%. |
Required: |
1. | What is last year’s margin? |
2. | What is last year’s turnover? (Round your answer to 1 decimal place.) |
3. | What is last year’s return on investment (ROI)? |
4. | What is the margin related to this year’s investment opportunity? |
5. | What is the turnover related to this year’s investment opportunity? (Round your answer to 1 decimal place.) |
6. | What is the ROI related to this year’s 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? (Round your percentage answer to 1 decimal place (i.e .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? (Round your percentage answer to 1 decimal place (i.e .1234 should be entered as 12.3)) |
10-a. | If Westerville’s 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? | ||
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10-b. | Would the owners of the company want her to pursue the investment opportunity? | ||
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11. | What is last year’s residual income? |
12. | What is the residual income of this year’s 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 Westerville’s 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? | ||
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15-a. | Assume that the contribution margin ratio of the investment opportunity was 75% instead of 80%. If Westerville’s 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? | ||
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15-b. | Would the owners of the company want her to pursue the investment opportunity? | ||
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