Westerville Company reported the following results from last year’s operations:
ID: 2470863 • Letter: W
Question
Westerville Company reported the following results from last year’s operations:
This year, the company has a $287,500 investment opportunity with the following cost and revenue characteristics:
The company’s minimum required rate of return is 15%.
1. What is last year’s margin? (%)
2. What is last year’s turnover? (Round your answer to 1 decimal place.)
3. What is last year’s return on investment (ROI)?(%)
4. What is the margin related to this year’s investment opportunity?
5. What is the turnover related to this year’s investment opportunity? (Round your answer to 1 decimal place.)
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? (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.)
9. 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 .1234 should be entered as 12.3)) (%)
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 $ 2,300,000 Variable expenses 670,000 Contribution margin 1,630,000 Fixed expenses 1,170,000 Net operating income $ 460,000 Average operating assets $ 1,437,500Explanation / Answer
Solution:
Statement showing calculation of Margin, Turnover & Return on investment:
1) Last year’s Margin:
Margin = Net Operating Income/ Sales
= 460,000/ 2,300,000
= 20%
2) Last year’s Turnover:
Turnover = Sales/ Average Operating Assets
= 2,300,000/ 1,437,500
= 1.60
3) Last year’s Return on Investment:
Return on Investment = Margin * Turnover
= 20% * 1.60
= 32%
4) Margin related to this year’s investment opportunity:
= 69,000/ 460,000
= 15%
5) Turnover related to this year’s investment opportunity:
= 460,000/ 287,500
= 1.60
6) ROI related to this year’s investment opportunity:
= 15% * 1.60
= 24%
7) If the company pursues the investment opportunity and otherwise performs the same as last year, what margin will it earn this year?
= (460,000 + 69,000)/ (2,300,000 + 460,000)
= 529,000/ 2,760,000
= 19.17%
8) If the company pursues the investment opportunity and otherwise performs the same as last year, what turnover will it earn this year?
= (2,300,000 + 460,000)/ (1,437,500 + 287,500)
= 2,760,000/ 1,725,000
= 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?
= 19.17% * 1.60
= 30.67%
Statement showing calculation of Residual Income:
10) Last year’s Residual Income:
Residual Income = 460,000 - (1,437,500 * 15%)
= 460,000 - 215,625
= 244,375
11) Residual Income of this year’s investment opportunity:
Residual Income = 69,000 - (287,500 * 15%)
= 69,000 - 43,125
= 25,875
12) If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?
= (460,000 + 69,000) - [(1,437,500 + 287,500) * 15%]
= 529,000 - (1,725,000 * 15%)
= 529,000 - 258,750
= 270,250
Present New Line Total 1 Sales 2,300,000 460,000 2,760,000 2 Operating income 460,000 69,000 529,000 3 Operating assets 1,437,500 287,500 1,725,000 4 Margin (2)/(1) 20.00% 15.00% 19.17% 5 Turnover (1)/(3) 1.60 1.60 1.60 6 ROI (4)*(5) 32.00% 24.00% 30.67%Related Questions
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