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 $362,500 investment opportunity with the following cost and revenue characteristics:

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

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? (Round your percentage answer to 1 decimal place (i.e .1234 should be entered as 12.3))

If the company pursues the investment opportunity and otherwise performs the same as last year, what turnover will it earn this year? (Round your answer to 2 decimal places.)

If the company pursues the investment opportunity and otherwise performs the same as last year, what ROI will it earn this year? (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be considered as 12.3%.))

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

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

Explanation / Answer

1. What is last year’s margin?

Margin = Operating Income / Net Sales

............= $300,000 / $1,500,000

............= 20%

2. What is last year’s turnover?

Turnover = Sales / Average total assets

................= $1,500,000 / $937,500

................= 1.60

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

ROI = Turnover x Margin

.......= 1.60 x 20%

.......= 32%

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

Net Operating Income = ($580,000 x 70%) - $319,000

....................................= $87,000

Margin = $87,000 / $580,000

............= 15%

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

Turnover = $580,000 / $362,500

................= 1.6

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

ROI = 15% x 1.6

........= 24%

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

Margin = ($87,000 + $300,000) / ($1,500,000 + $580,000)

............= $387,000 / $2,080,000

............= 18.61%

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

Turnover = $2,080,000 / ($937,500 + $362,500)

................= 1.60

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

ROI = 18.61% x 1.6

........= 29.78%

11. What is last year’s residual income?

Residual Income = $300,000 - ($937,500 x 10%)

............................= $300,000 - $93,750

............................= $206,250

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

Residual Income = $87,000 - ($362,500 x 10%)

............................= $50,750

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

Residual Income = $206,250 + $50,750

............................= $257,000

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