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 $237,500 investment opportunity with the following cost and revenue characteristics:

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

5. What is the turnover related to this year's investment opportunity?

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?

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

9. IF the compmany pursues the investment opportunity and otherwise performs the same as last year, what ROI will it earn this year?

11. What is last year's residual income?

12. What is the residual income of this year's investment opportunity?

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

  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    

Explanation / Answer

5. What is the turnover related to this year's investment opportunity? Turnover in terms of $ = $380,000 Turnover in terms of times of assets = $380,000/$237500 Turnover in terms of times of assets = 1.60 Times 6. What is the ROI related to this year's investment opportunity? ROI related to this year's investment opportunity = (Net profit from this years investment opportunity /Investment) * 100 ROI related to this year's investment opportunity = [($380000-50%*380000-133000)/237500]*100 = [$57,000/$237,500]*100 = 0.24*100 = 24% 7. 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 Net operating income from the last year = $475000 Net operating income from investing opportunity = [($380000-50%*380000-133000) = $57000 Total net operating income $532,000 Total turnover (1900000+380000) $2,280,000 Margin (532000/2280000)*100 23% If performs the same as last year Net operating income from the last year $475,000 Total turnover (1900000) $1,900,000 Margin (475000/1900000)*100 25% 8. If the company pursues the investment opportnity and otherwise performs the same as last year, what turnover will it earn this year? If pursue the investment If performs the same as last year Sales $2,280,000 $1,900,000 Average operating assets $1,425,000 $1,187,500 Turnover 160% 160% or 1.60 1.60 9. IF the compmany pursues the investment opportunity and otherwise performs the same as last year, what ROI will it earn this year? If pursue the investment If performs the same as last year Net Operating income $532,000 $475,000 Average operating assets $1,425,000 $1,187,500 ROI 37% 40% 11, 12 Last year Investment opportunity Average operating assets $1,187,500 $237,500 Minimum required rate of return (10%) (A) $118,750 $23,750 Net Operating income (B) $475,000 $57,000 Residual income (B-A) $356,250 $33,250 13. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this yea If pursue the investment If performs the same as last year Average operating assets $1,425,000 $1,187,500 Minimum required rate of return (10%) (A) $142,500 $118,750 Net Operating income (B) $532,000 $475,000 Residual income (B-A) $389,500 $356,250

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