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

Question

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

At the beginning of this year, the company has a $287,500 investment opportunity with the following cost and revenue characteristics:

The company’s minimum required rate of return is 15%.

6a. What is the ROI related to this year’s investment opportunity? (Do not round intermediate calculations.)

6b. 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).)

6c. 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.)

6d. 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).)

6e. What is last year’s residual income?

Sales $ 2,300,000 Variable expenses 670,000 Contribution margin 1,630,000 Fixed expenses 1,170,000 Net operating income $ 460,000 Average operating assets $ 1,437,500

Explanation / Answer

6)a. ROI related to this year’s investment opportunity:

= Margin * Turnover

= 15% * 1.60

= 24%

Margin related to this year’s investment opportunity:

= 69000/ 460000

= 15%

Turnover related to this year’s investment opportunity:

= 460000/ 287500

= 1.60

6)b. Margin = Total Net Income / Total Sales

= (460000 + 69000)/ (2300000 + 460000)

= 529000/ 2760000

= 19.17%

6)c. Turnover = Total Sales / Total Assets

= (2300000 + 460000)/ (1437500 + 287500)

= 2760000/ 1725000

= 1.60

6)d. ROI = Margin * Turnover

= 19.17% * 1.60

= 30.67%

6)e. Residual Income :-

= 460000 - (1437500 * 15%)

= 460000 - 215625

= 244375

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