Question

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

Sales	$	1,400,000
Variable expenses		720,000
Contribution margin		680,000
Fixed expenses		470,000
Net operating income	$	210,000
Average operating assets	$	875,000
At the beginning of this year, the company has a $350,000 investment opportunity with the following cost and revenue characteristics: Sales $ 560,000 Contribution margin ratio 70 % of sales Fixed expenses $ 336,000 The company’s minimum required rate of return is 15%. Required 1. What is the ROI related to this year’s investment opportunity? 2. If the company pursues the investment opportunity and otherwise performs the same as last year, what margin will it earn this year? 3. If the company pursues the investment opportunity and otherwise performs the same as last year, what turnover will it earn this year? 4. What is last year’s residual income? 5. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?

Answer 1

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Part 1.
Sales	$                 560,000
Les:Variable Cost	$                 168,000
Contribution Margin	$                 392,000
Less: Fixed Cost	$                 336,000
Net Income	$                   56,000
Return on Investment	56000/350000	16.00%
Net Income/Investment
Part 2.
		New	LY	Total
Sales		$              560,000	$1,400,000	$1,960,000
Les:Variable Cost		$              168,000	$   720,000	$   888,000
Contribution Margin		$              392,000	$   680,000	$1,072,000
Less: Fixed Cost		$              336,000	$   470,000	$   806,000
Net Income		$                56,000	$   210,000	$   266,000
Margin	1072000/1960000			54.69%
Part 3.
Sale		$          1,960,000
Average Operating Assets		$          1,225,000
Turnover		1.60
Sales/Average Operating Assets
Part 4.
Average Operating Assets	a	$              875,000
Required Rate of Return	b	15%
Required Operating Income	a*b	$          131,250.0
Actual Operating Income	c	$          210,000.0
Required Operating Income	a*b=d	$          131,250.0
Residual Income	c-d	$            78,750.0
Part 5.
Average Operating Assets	a	$          1,225,000
Required Rate of Return	b	15%
Required Operating Income	a*b	$          183,750.0
Actual Operating Income	c	$          266,000.0
Required Operating Income	a*b=d	$          183,750.0
Residual Income	c-d	$            82,250.0