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Westerville Company reported the following results from last year’s operations: Sales $ 2,300,000 Variable expenses 670,000...

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

Sales $ 2,300,000
Variable expenses 670,000
Contribution margin 1,630,000
Fixed expenses 1,170,000
Net operating income $ 460,000
Average operating assets $ 1,437,500

At the beginning of this year, the company has a $287,500 investment opportunity with the following cost and revenue characteristics:

Sales $ 460,000
Contribution margin ratio 50 % of sales
Fixed expenses $ 161,000

The company’s minimum required rate of return is 15%.

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?

9. If the company pursues the investment opportunity and otherwise performs the same as last year, what ROI will it earn this year?

11. What is last year’s residual income?

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Expert Solution

6. ROI related to this year Investment opportunity is 24%. Working given below:

This year Planning $
Investment 287500
Sales 460000
Contribution margin 50%
Contribution 230000
Fixed Expenses 161000
Net operating Income 69000
ROI 24%

7. If the company pursues the investment opportunity and otherwise performs the same as last year, then the margin will be $ 92000. working given below:

This year Planning $
Investment 287500
Sales 460000
Contribution margin 50%
Contribution 230000
Fixed Expenses 161000
Net operating Income 69000
ROI 24.00%
ROI based on last year 32%
Net operating Income based on last year 92000

8. It will earn a turnover of $506000. working given below:

Net operating Income for the year 92000
Fixed expenses 161000
Contribution 253000
Contribution margin 50%
Sales 506000

9. It will earn a ROI of 32%. working given below:

Net operating Income for the year 92000
Fixed expenses 161000
Contribution 253000
Contribution margin 50%
Sales 506000
ROI 32%
Investment 287500

10. Residual Income $244375. Working given beow:

Average operating Assets 1437500
Sales Last year 2300000
Variable Expenses 670000
Contribution Margin 1630000
Fixed Expenses 1170000
Net operating Margin 460000
Return of Investment 32.00%
Minimum ROI 15%
Minimum ROI in value 215625
Residual Income 244375

ekkarill92 answered 1 year ago
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