[The following information applies to the questions displayed below.] Westervill

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[The following information applies to the questions displayed below.]

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

This year, the company has a $275,000 investment opportunity with the following cost and revenue characteristics:

1.

value:
0.66 points

Required information

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WorksheetLearning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI.

Difficulty: 2 MediumLearning Objective: 11-02 Compute residual income and understand its strengths and weaknesses.

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What is last year’s turnover? (Round your answer to 1 decimal place.)

What is last year’s return on investment (ROI)?

What is the turnover related to this year’s investment opportunity? (Round your answer to 1 decimal place.)

What is the ROI 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? (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.)

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., 0.1234 should be considered as 12.3%.))

Required information

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?

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?

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

Explanation / Answer

Solution:

1) Last Year’s Margin = Net Operating Income / Sales x 100 = 440,000 / 2,200,000 x 100 = 20%

2) Last Year’s Turnover = Sales / Average Operating Assets = 2,200,000 / 1,375,000 = 1.6 times

3) Last Year’s Return on Investment = Margin * Turnover = 20% x 1.6 = 32%

4) Margin related to this year’s investment opportunity = Net Operating Income related to this year’s investment / Sales x100

= 44,000 / 440,000 x 100

= 10%

Net Operating Income = Contribution Margin 440,000*60% - Fixed Expenses $220,000

= 264,000 – 220,000

= $44,000

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