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

Question

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

Sales $ 1,900,000

Variable expenses 550,000

Contribution margin 1,350,000

Fixed expenses 875,000

Net operating income $ 475,000

Average operating assets $ 1,187,500

This year, the company has a $237,500 investment opportunity with the following cost and revenue characteristics:

Sales $ 380,000

Contribution margin ratio 50 % of sales

Fixed expenses $ 133,000

The company’s minimum required rate of return is 10%.

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., 0.1234 should be considered as 12.3%.)) Garrison 15e Recheck 2014-12-29

10. What is last year’s residual income?

11. What is the residual income of this year’s investment opportunity?

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

Explanation / Answer

1. Last years margin = $13,50,000

Contribution margin ratio = ($1350000/$1900000)*100

= 71.05%

2. Last years turnover = $1900000

3. ROI= (Net operating Income/Operating assets or capital employed)*100

last year's ROI = ($475000/$1187500)*100

= 40%

4. Current year's Margin = $380000*50%

= $190000

5. Current year,s turnover related to investment = $380000

6. This year's operating income related to invetment = sale*Margin ration - fixed cost

= $380000*50% - $133000

= $57000

ROI = ($57000/$237500)*100

= 24%

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