Westerville Company reported the following results from last year’s operations:
ID: 2485009 • Letter: W
Question
Westerville Company reported the following results from last year’s operations:
Sales
$
1,800,000
Variable expenses
435,000
Contribution margin
1,365,000
Fixed expenses
1,005,000
Net operating income
$
360,000
Average operating assets
$
1,200,000
This year, the company has a $300,000 investment opportunity with the following cost and revenue characteristics:
Sales
$
360,000
Contribution margin ratio
70
% of sales
Fixed expenses
$
216,000
The company’s minimum required rate of return is 10%.
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))
8. 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))
10A. 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/NO
10B. Would the owners of the company want her to pursue the investment opportunity? YES/NO
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?
14. 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/NO
15A. 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/NO
15B. Would the owners of the company want her to pursue the investment opportunity? YES/NO
Westerville Company reported the following results from last year’s operations:
Sales
$
1,800,000
Variable expenses
435,000
Contribution margin
1,365,000
Fixed expenses
1,005,000
Net operating income
$
360,000
Average operating assets
$
1,200,000
This year, the company has a $300,000 investment opportunity with the following cost and revenue characteristics:
Sales
$
360,000
Contribution margin ratio
70
% of sales
Fixed expenses
$
216,000
The company’s minimum required rate of return is 10%.
Explanation / Answer
Answer 1. Last Year Margin = Net Income / Sales = 360,000 / 1,800,000 = 20% Answer 2. Turnover = Sales / Avg. opearting assets Last year Turnover = 1,800,000 / 1,200,000 = 1.50 Answer 3. ROI = Margin X Turnover Last year ROI = 20% X 1.50 = 30% Answer 4. Sales 360,000 Contribution Margin Ratio 70% Contribution (360,000 X 70%) 252,000 Less: Fixed Expenses 216,000 Net Income 36,000 Margin (Related to Investment Oppourtunity) = 36000 / 360000 = 10% As per Chegg Guidelines, You can ask only one question at a time having four subparts. For other parts or Questions please ask it again.
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