[The following information applies to the questions displayed below.]
Westerville Company reported the following results from last year’s operations: |
Sales |
$ |
1,500,000 |
Variable expenses |
730,000 |
|
|
|
|
Contribution margin |
770,000 |
|
Fixed expenses |
470,000 |
|
|
|
|
Net operating income |
$ |
300,000 |
|
|
|
Average operating assets |
$ |
937,500 |
|
|
|
|
This year, the company has a $362,500 investment opportunity with the following cost and revenue characteristics: |
Sales |
$ |
580,000 |
|
Contribution margin ratio |
70 |
% of sales |
|
Fixed expenses |
$ |
319,000 |
|
|
The company’s minimum required rate of return is 10%. |
Required: |
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)) |
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? |
10-b. |
Would the owners of the company want her to pursue the investment opportunity? |
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? |
15-a. |
Assume that the contribution margin ratio of the investment opportunity was 60% 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? |
15-b. |
Would the owners of the company want her to pursue the investment opportunity? |