# Westerville Company reported the following results from last year's operations: Sales . . . . . .

## Question:

Westerville Company reported the following results from last year's operations:

Sales . . . . . . . . . . . . . . . . . . . . . . $1,000,000

Variable expenses . . . . . . . . . . . . . 300,000

Contribution margin . . . . . . . . . . . . 700,000

Fixed expenses . . . . . . . . . . . . . . . 500,000

Net operating income . . . . . . . . . . $ 200,000

Average operating assets . . . . . . . $625,000

This year, the company has a $120,000 investment opportunity with the following cost and revenue characteristics:

Sales . . . . . . . . . . . . . . . . . . . . . . . . . $200,000

Contribution margin ratio . . . . . . 60% of sales

Fixed expenses . . . . . . . . . . . . . . . . . . $90,000

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?

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?

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?

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

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?

15. Assume that the Contribution margin ratio of the investment opportunity was 50% instead of 60%. 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? Would the owners of the company want her to pursue the investment opportunity?

Contribution MarginContribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...

## Step by Step Answer:

**Related Book For**

## Introduction to Managerial Accounting

**ISBN:** 978-0078025792

7th edition

**Authors:** Peter Brewer, Ray Garrison, Eric Noreen