Question

 

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%. 5. a. What is the ROI related to this year’s investment opportunity? (Round your answer to the nearest whole percent. b. 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)) . 6. 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.) 7. 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)) 8. 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     8-b. Would the owners of the company want her to pursue the investment opportunity?       Yes No        9. What is last year’s residual income?        10. What is the residual income of this year’s investment opportunity? 11. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year? 12. 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 PLEASE ANSWER ALL THE QUESTION

Answer 1

Answer 5
Contribution margin (200000*60%)			$          120,000
Fixed expenses			$             90,000
Net operating income			$             30,000
Divided by: Average operating assets			$          120,000
ROI related to this year’s investment opportunity			25%
	Last year's Perfromance	New investment	Current year
Contribution margin	$         700,000	$        120,000	$          820,000
Fixed expenses	$         500,000	$           90,000	$          590,000
Net operating income	$         200,000	$           30,000	$          230,000
Divided by: Sales	$     1,000,000	$        200,000	$       1,200,000
Profit margin			19.2%
Answer 6
	Last year's Perfromance	New investment	Current year
Sales	$     1,000,000	$        200,000	$       1,200,000
Divided by: Average operating assets	$         625,000	$        120,000	$          745,000
Turnover			1.61
Answer 7
Net operating income			$          230,000
Divided by: Average operating assets			$          745,000
Current year's ROI			30.9%
Answer 8
Past year:
Net operating income			$          200,000
Divided by: Average operating assets			$          625,000
Past year's ROI			32.0%
Current year's ROI (30.9%) is less than Past year's ROI of 32%
Chief executive officer wouldn't pursue the investment opportunity.			No
Company’s minimum required rate of return			15%
ROI of new investmement			25%
ROI of new investmement (25%) is more than company’s minimum required rate of return.
Owners of the company want her to pursue the investment opportunity.			Yes
Answer 9 to 11
	Last year's Perfromance	New investment	Current year
Average operating assets	$         625,000	$        120,000	$          745,000
Multiply by: minimum required rate of return	15%	15%	15%
Minimum required return	$           93,750	$           18,000	$          111,750
Net operating income	$         200,000	$           30,000	$          230,000
Less: Minimum required return	$           93,750	$           18,000	$          111,750
Residual income	$         106,250	$           12,000	$          118,250
Last year’s residual income (Answer 9)	$         106,250
Residual income of this year’s investment opportunity (Answer 10)		$           12,000
Current year’s residual income (Answer 11)			$          118,250
Answer 12
Last year’s residual income			$          106,250
Current year’s residual income			$          118,250
Current year's residual income (118250) is less than Past year's residual income of 106250.
Chief executive officer would pursue the investment opportunity.			Yes