Westerville Company reported the following results from last year’s operations:
ID: 2407991 • Letter: W
Question
Westerville Company reported the following results from last year’s operations:
Sales
$
1,500,000
Variable expenses
730,000
Contribution margin
770,000
Fixed expenses
470,000
Net operating income
$
300,000
Average operating assets
$
937,500
This year, the company has a $362,500 investment opportunity with the following cost and revenue characteristics:
Sales
$
580,000
Contribution margin ratio
70
% of sales
Fixed expenses
$
319,000
The company’s minimum required rate of return is 10%.
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?
Yes
No
10-b.
Would the owners of the company want her to pursue the investment opportunity?
Yes
No
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?
No
Yes
15-a.
Assume that the contribution margin ratio of the investment opportunity was 60% instead of 70%. 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?
No
Yes
15-b.
Would the owners of the company want her to pursue the investment opportunity?
Yes
No
Top of Form
Bottom of Form
Westerville Company reported the following results from last year’s operations:
Explanation / Answer
Last year ROI =net income /operating assets *100
=$300,000/$937500*100=32 percent or 0.32
RI= operating adsets*(ROI-min rate)
$937500*(0.32-0.1)=$206250
This year when you consider the investment opportunity of $362500
Sales $580,000
Contribution 70percent is sales =$406000
Net income =contribution -fixrd cost
= $406000-319000=$87000
ROI =$87000/$362500=0.24 or 24 percent
RI = 362500*(0.24-0 1)=$50750
If you considered the contribution margin 60 instead of 70 percent
Sales =580,000
Contribution = 60percent of sales $348000
Net income =348000-319000=$29000
ROI=$29000/362500=0 08
RI = 362500*(0 08-0.1)=- 7250
10) a no
10b no
11) 206250 see above calculations
12) $50750 see above
13a. See above
14) no
15 no
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