Westerville Company reported the following results from last year’s operations:
ID: 2470602 • Letter: W
Question
Westerville Company reported the following results from last year’s operations:
This year, the company has a $200,000 investment opportunity with the following cost and revenue characteristics:
The company’s minimum required rate of return is 10%.
What is last year’s turnover?
What is the turnover 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?
Would the owners of the company want her to pursue the investment opportunity?
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 50% instead of 60%. 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?
Would the owners of the company want her to pursue the investment opportunity?
Westerville Company reported the following results from last year’s operations:
Explanation / Answer
(2) Last year turnover = Last year sales = $1,500,000
(5) Turnover for this year's opportunity = $300,000
(7)
Total sales = $(1,500,000 + 300,000) = $1,800,000
Contribution margin (in line with last year) = $1,000,000
Contribution margin from investment = $300,000 x 60% = $180,000
Total Contribution margin = $(1,000,000 + 180,000) = $1,180,000
Total fixed expense = $(700,000 + 132,000) = $832,000
Total net income = Total contribution margin - Total fixed cost
= $(1,180,000 - 832,000) = $348,000
So, overall margin = Net income / Sales = $348,000 / $1,800,000 = 0.1933, or 19.33%
(8)
Total turnover = $(1,500,000 + 300,000) = $1,800,000
NOTE: First 4 questions are answered.
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