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

At the beginning of this year, the company has a $350,000 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, turnover and return on investment (ROI)?? (For Turn over Round your answer to 1 decimal place.)

2. What is the margin, turnover and return on investment (ROI) related to this year’s investment opportunity?  (For turn over Round your answer to 1 decimal place.)

3. If the company pursues the investment opportunity and otherwise performs the same as last year, what margin, turnover and return on investment (ROI) will it earn this year? (For margin and ROI Round your percentage answer to 1 decimal place (i.e .1234 should be entered as 12.3)) (For Turn over Round your answer to 2 decimal places.)

4. 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?

5. 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?

6. 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?

7. 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? Would the owners of the company want her to pursue the investment opportunity?

Sales $ 1,400,000 Variable expenses 720,000 Contribution margin 680,000 Fixed expenses 470,000 Net operating income $ 210,000 Average operating assets $ 875,000

Explanation / Answer

Solution 1:

Last year margin = Net operating income / Sales = $210,000 / $1,400,000 = 15%

Turnover = Sales / Average operating assets = $1,400,000 / $875,000 = 1.60 times

Return on investment = Margin * turnover = 15% * 1.60 = 24%

Solution 2:

Net operating income for investment opportunity = $560,000*70% - $336,000 = $56,000

Margin = $56,000 / $560,000 = 10%

Turnover = $560,000 / $350,000 = 1.60 times

ROI = Margin * Turnover = 10% * 1.6 = 16%

Solution 3:

Total operating income for next year = $210,000 + $56,000 = $266,000

Total sales for next year = $1,400,000 + $560,000 = $1,960,000

Average operating assets for next year = $875,000 + $350,000 = $1,225,000

Margin = $266,000 / $1,960,000 = 13.57%

Turnvoer = $1,960,000 / $1,225,000 = 1.6 times

ROI = 13.57% * 1.6 = 21.71%

Solution 4:

ROI of next year will decrease from ROI of last year if Westerville pursue the investment opportunity, therefore CEO of the company will not pursue the investment opportunity as it will result in decreasing the bonus.

Owners of the company want CEO to pursue the investment opportunity because ROI provided by investment opportunity in higher than minimum required return of the company.

Note: I have answered sufficent parts as per chegg policy. Kindly post separate question for answer of remaining parts

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