Question

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

Sales	$	1,400,000
Variable expenses		510,000
Contribution margin		890,000
Fixed expenses		610,000
Net operating income	$	280,000
Average operating assets	$	875,000

At the beginning of this year, the company has a $175,000 investment opportunity with the following cost and revenue characteristics:

Sales	$	280,000
Contribution margin ratio		50	% of sales
Fixed expenses	$	98,000

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

1-1.  What is last year’s margin?

1-2. What is last year’s turnover?

2. What is last year’s return on investment (ROI)?

3. What is the margin related to this year’s investment opportunity?

Answer 1

	1)    1	Margin
		= Net Operating Income / Sales
		=$280000/1400000
		20.00%
	1)       2
		Turnover means sales generated by the business
		=$1400000
	2)	Return On Investement
		= Net Operating Income / Average Assets
		=$280000/875000
		32.00%
	3)	margin related to this year’s investment opportunity
		Sales		$       2,80,000
		Less: Variable Cost		$       1,40,000
		Contribution Margin		$       1,40,000
		Less: Fixed Cost		$           98,000
		Net Operating Income		$           42,000
		Margin = 42000/280000
		15.00%