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

Question

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

This year, the company has a $325,000 investment opportunity with the following cost and revenue characteristics:

The company’s minimum required rate of return is 15%.

What is last year's margin?

What is last year's turnover?

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?

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

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

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

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

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 or No.

Would the owners of the company want her to pursue the investment opportunity? Yes or No.

What is last year’s residual income?

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

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

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?

Assume that the contribution margin ratio of the investment opportunity was 65% 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? Yes or No.

Would the owners of the company want her to pursue the investment opportunity? Yes or No.

  Sales $ 1,600,000       Variable expenses 700,000       Contribution margin 900,000       Fixed expenses 660,000       Net operating income $ 240,000       Average operating assets $ 1,000,000    

Explanation / Answer

Last year's margin = Net operatng income / Sales = $240,000 / $1,600,000 = 15%

Last year's turnover = Sales / Average operating assets = $1,600,000 / $1,000,000 = 1.6

Last year's ROI = Net operating income / Average operating assets = $240,000 / $1,000,000 = 24%

Margin related to this year's investent opportunity

= Net operating income / Sales

= ($520,000 x 70%) - $312,000 / $520,000

= 10%

Turnover related to this year's investment opportunity

= Sales / Average operating assets

= $520,000 / $325,000

= 1.6

ROI related to this year's investment opportunity

= Net operating investment / Average operating assets

= ($520,000 x 70%) - $312,000 / $325,000

= 16%

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