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%

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?

Please help. My answer is wrong please explain. Thank you your time is appreciated.

Explanation / Answer

7)

Calculate the company pursues the investment opportunity and otherwise performs the same as last year, what margin it will earn this year:

Margin = Net operating income / Sales

= ($475,000 + $38,000) / ($1,900,000 + $380,000)

= $513,000 / $2,280,000

= 22.5%

Therefore, percentage of margin is 22.5%.

8)

Calculate the company pursues the investment opportunity and otherwise performs the same as last year, what turnover will it earn this year:

Turnover = Sales / Average operating assets

= ($1,900,000 + $380,000) / $1,187,500

= $2,280,000 /$1,187,500

= 1.92

Therefore, turnover is 1.92 times.

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