((PLEASE SHOW ALL YOUR STEPS TO HOW YOU GOT YOUR ANSWERS)) Westerville Company r
ID: 2559968 • Letter: #
Question
((PLEASE SHOW ALL YOUR STEPS TO HOW YOU GOT YOUR ANSWERS)) Westerville Company reported the following results from last year’s operations: Sales $ 1,000,000 Variable expenses 300,000 Contribution margin 700,000 Fixed expenses 500,000 Net operating income $ 200,000 Average operating assets $ 625,000 This year the company has a $120,000 investment opportunity with the following cost and revenue characteristics: Sales $ 200,000 Contribution margin ratio 60 % of sales Fixed expenses $ 90,000 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 2 decimal places.) 6. What is the ROI related to this year’s investment opportunity? (Round your answer to the nearest whole percent.) 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 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)) 10-a. 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 10-b. 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?
Explanation / Answer
Answer: 1) last year Margin (%) = Net Operating Income/Sales =200000/1000000*100 = 20%
2) last year turnover = $1000000
3) last year ROI =Net operating income/ Average operating assets*100 = 200000/625000*100= 32%
4) sales = $200000 contribution margin = $200000*.6 =120000 fixed expenses = $90000
net operating income = 120000-90000= $30000
Margin (%)= 30000/200000*100 = 15%
5) Turnover = $ 200000
6) ROI = Net operating income/ Average operating assets*100 = 30000/120000*100= 25%
7) Total Sales = 1000000+200000 = $ 1200000
Total net operating income = 200000+30000 = $230000
New margin = 230000/1200000*100 = 19.2%
8) New Turnover = 1000000+200000 = $1200000
9) Total average operating assets = 625000+120000 = $745000
New ROI = 230000/745000*100 = 30.9%
10-a) No, ROI is decreasing from last year, so CEO cannot earn bonus . Hence she would not pursue the investment opportunity.
b) Yes, owners want her to pursue the investment opportunity.
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