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7-7 Westerville Company reported the following results from last year’s operations: Sales $ 1,500,000 Variable expenses...

7-7

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

Sales $ 1,500,000
Variable expenses 690,000
Contribution margin 810,000
Fixed expenses 435,000
Net operating income $ 375,000
Average operating assets $ 1,250,000

At the beginning of this year, the company has a $350,000 investment opportunity with the following cost and revenue characteristics:

Sales $ 420,000
Contribution margin ratio 70 % of sales
Fixed expenses $ 252,000

The company’s minimum required rate of return is 10%.

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).)

____%

Solutions

Expert Solution

Computation the total accumulated profit margin percentage for this year is:

Total accumulated profit margin percentage for this year = (Total value of operating income of this year / Total value of sales of this year) * 100

= ($417,000 / $1,920,000) * 100

= 0.217 * 100

= 21.7%

Hence, the total accumulated profit margin percentage for this year is 21.7%.

Working notes:

1.

Computation the value of variable costs is:

Value of variable costs = Value of sales * (1 - Percentage of contribution margin)

= $420,000 * (1 - 0.70)

= $420,000 * 0.30

= $126,000

Hence, the value of variable costs is $126,000.

2.

Computation the value of contribution margin is:

Value of contribution margin = Value of sales - Value of variable costs

= $420,000 - $126,000

= $294,000

Hence, the value of contribution margin is $294,000.

3.

Computation the value of operating income of this year is:

Value of operating income of this year = Value of contribution margin - Value of fixed costs

= $294,000 - $252,000

= $42,000

Hence, the value of operating income of this year is $42,000.

4.

Computation the total value of operating income of this year is:

Total value of operating income of this year = Value of operating income of last year + Value of operating income of this year

= $375,000 + $42,000

= $417,000

Hence, the total value of operating income of this year is $417,000.

5.

Computation the total value of sales of this year is:

Total value of sales of this year = Value of sales of last year + Value of sales of this year

= $1,500,000 + $420,000

= $1,920,000

Hence, the total value of sales of this year is $1,920,000.

ekkarill92 answered 1 year ago
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