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

Question

Westerville Company reported the following results from last year’s operations: Sales $ 1,500,000 Variable expenses 690,000 Contribution margin 810,000 Fixed expenses 435,000 Net operating income $ 375,000 Average operating assets $ 1,250,000 This year, the company has a $350,000 investment opportunity with the following cost and revenue characteristics: Sales $ 420,000 Contribution margin ratio 70 % of sales Fixed expenses $ 252,000 The company’s minimum required rate of return is 10%.

1. What is last year’s margin?

What is last year’s turnover? (Round your answer to 1 decimal place.)

What is last year’s return on investment (ROI)?

What is the margin related to this year’s investment opportunity?

What is the turnover related to this year’s investment opportunity? (Round your answer to 1 decimal place.)

Explanation / Answer

1. Last Year Margin = Net Operating Income / Net sales

   = $375000 / $1500000

   = 25%

Last year Turnover = Net Sales / Average Total Assest

   = $1500000 / $1250000

= 1.2

Last year’s return on investment (ROI) = Net operating income / Total investment

= $375000 / $2500000

   = 15%

Note: Total investment = Average operating Assets * 2

   = $ 1,250,000 * 2

   = $2500000

Margin related to this year’s investment opportunity =  Net Operating Income / Net sales

   = $42000 / $420000

   = 10%

Note: Sales = $420000

Less: Variable Cost = $126000

Contribution (70% * $420000) = $294000

Less::Fixed Cost = $252000

  Net Operating Income = $42000

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