Question

Ch 11f

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

Sales	$	1,400,000
Variable expenses		680,000
Contribution margin		720,000
Fixed expenses		440,000
Net operating income	$	280,000
Average operating assets	$	875,000

At the beginning of this year, the company has a $300,000 investment opportunity with the following cost and revenue characteristics:

Sales	$	480,000
Contribution margin ratio		80	% of sales
Fixed expenses	$	336,000

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

1. What is last year’s margin? What is last year’s turnover? What is last year’s return on investment (ROI)? and What is the margin related to this year’s investment opportunity?

2. What is the turnover related to this year’s investment opportunity? (Round your answer to 1 decimal place.) and What is the ROI related to this year’s investment opportunity?

3. 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

4. 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.)

thank you

Answer 1

1.

a) Margin = Net operating income/Sales

= 280,000 / 1400000

= 20%

b)

Last year’s turnover is:

Turnover = Sales / Average operating assets

=1400000 / 875,000

= 1.6

c) Last year’s return on investment (ROI) is:

ROI = Margin * Turnover

= 20% * 1.6

= 32%

d) The margin for this year’s investment opportunity is:

Margin = Net operating income / Sales

= 48000 / 480000

= 10%

2.

a) The turnover for this year’s investment opportunity is:

Turnover = Sales / Average operating assets

= $480,000 / $300,000

= 1.6

b) The ROI for this year’s investment opportunity is:

ROI = Margin * Turnover

= 10% * 1.6

= 16%

3.

If the company pursues the investment opportunity, this year’s margin would be:

Margin = Net operating income / Sales

= ($280,000 + $48,000) / ($1,400,000 + $480,000 )

= $328,000 / $1,880,000

= 17.45%

4.

If the company pursues the investment opportunity, this year’s turnover would be:

Turnover = Sales / Average operating assets

= ($1,400,000 + $480,000) / ($875,000 + $300,000)

= $1,880,000 / $1,175,000

= 1.60