[The following information applies to the questions displayed below.j Westerile

Question

[The following information applies to the questions displayed below.j Westerile Company reportes e folowing resuts rom astyers operatons $2,200,000 660,000 Sales Variable expenses 1,540,000 1,100,000 Contribution margin Fixed expenses Net operating income Average operating assets $440,000 $ 1,375,000 This year, the company has a $275,000 investment opportunity with the following cost and revenue characteristics: Sales Contribution margin ratio Fixed expenses $440,000 60% of sales The company's minimum required rate of return is 15%.

Explanation / Answer

Answer

Note : Residual income is net income that an investment can earn over the minimum rate of return.

Answer 11

Figures in $

Particulars

Amount

Average operating assets

a

1375000

Minimum required rate of return

b

15%

Minimum return          (a*b)

c

206250

Actual Net operating income of last year

d

440000

Residual income     (d-c)

233750

Answer 12

Figures in $

Particulars

Amount

Contribution margin ratio

a

264000

(440000*0.6)

Fixed Expenses

b

220000

Net operating income     (a-b)

c

44000

investment

d

275000

Minimum required rate of return

e

15%

Minimum return        (d*e)

f

41250

Residual income         (c-f)

2750

Answer 13

Figures in $

Particulars

Amount

Total net operating income

a

484000

(440000+44000)

Total investment

b

1650000

(1375000+275000)

Minimum required rate of return

c

15%

Minimum required return (b*c)

d

247500

Residual income                 (a-d)

236500

Answer 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 She would peruse the investment opportunity.

Answer : Yes

Answer 15-a

: Assume that contribution margin ratio of investment opportunity was 55% instead of 60%.

Figures in $

Particulars

Amount

Contribution margin ratio

a

242000

(440000*0.55)

Fixed Expenses

b

220000

Net operating income      (a-b)

c

22000

investment

d

275000

Required rate of return

e

15%

Minimum retrun        (d*e)

f

41250

Residual income         (c-f)

-19250

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 She would not peruse the investment opportunity as residual income of new investment is negative.

Answer : No

Answer 15-b

The owner of the company would not want her to pursue the investment opportunity as it will reduce overall rate of return on investments.

Answer : No

Figures in $

Particulars

Amount

Average operating assets

a

1375000

Minimum required rate of return

b

15%

Minimum return          (a*b)

c

206250

Actual Net operating income of last year

d

440000

Residual income     (d-c)

233750

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