Question

 

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

At the beginning of 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%.

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., 0.1234 should be entered as 12.3).)

Answer 1

Final Answer:	Margin = 18.61%
Margin = Net Operating income / sales
=(300000 + 87000) / (1500000+580000)
18.61%
Caluclation of Current year net operating income
Sales	580,000
Contribution margin ratio	70%
Contribution margin	406,000
Less: Fixed Expense	319,000
Net Operating income	87,000