Westerville company reported the following results from last year's operations

Question

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

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%.

Required:

1.	What is last year’s margin?

2.	What is last year’s turnover? (Round your answer to 1 decimal place.)

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

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

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

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? (Round your answer to 2 decimal places.)

9.	If the company pursues the investment opportunity and otherwise performs the same as last year, what ROI will it earn this year? (Round your percentage answer to 1 decimal place (i.e .1234 should be entered as 12.3))

10-a.

If Westerville’s chief executive officer will earn a bonus only if her ROI from this year exceeds her ROI from last year, would she pursue the investment opportunity?

No

Yes

10-b.

Would the owners of the company want her to pursue the investment opportunity?

Yes

No

11.	What is last year’s residual income?

12.	What is the residual income of this year’s investment opportunity?

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

14.

If Westerville’s chief executive officer will earn a bonus only if her residual income from this year exceeds her residual income from last year, would she pursue the investment opportunity?

No

Yes

15-a.

Assume that the contribution margin ratio of the investment opportunity was 75% instead of 80%. If Westerville’s Chief Executive Officer will earn a bonus only if her residual income from this year exceeds her residual income from last year, would she pursue the investment opportunity?

No

Yes

15-b.

Would the owners of the company want her to pursue the investment opportunity?

Yes

No

[su_box title="♦ Relevant knowledge" box_color="#2d6ff7" radius="1"]Return On investment (ROI) is an economic measure of profit that is widely used to gauge the returns or the return of an investment. ROI is a proportion of the returns on an investment to its expense. It is an important factor to consider when making an assessment of the potential return from an investment made by an individual.

The process of calculating ROI is a straightforward one. It can be determined using one of these two methods.

You will take the growth in sales from the business or product line and subtract the marketing expenses and split it up by marketing expenses.

ROI = (Sales Growth – Marketing Costs) / Marketing Costs

[/su_box]

kttutoria · Accepted Answer

tonytutoria · Answer

(1) Margin = operatin income/ net sales

= 280,000/1,400,000

= 20%

(2) turonver = sales/ Average total assets

= 1,400,000/875,000

= 1.6

(3) ROI = 1.6*20 = 32%

(4) Margin = 480,000@80% - 336,000 = $48,000

= 48,000/480,000 = 10%

(5) Turnover = 480,000/300,000 = 1.6

(6) ROI = 10*1.6 = 16%

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

= 17.45%

(8) Turnover = 1,880,000/1,175,000 = 1.6

(9) Roi = 1.6*17.45 = 27.92%

10 A) no

b) yes

11) Last years residual invome

Net operating income 280,000

mimimun return 875,000@15% 131,250

Residual income 148,750

12) AVerage operating assets 300,000

Net operating income 48,000

Minimum rate return 300,000@15% 45,000

Residual income 3,000

13) $151,750

14) yes

15) a and b - n0

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Westerville company reported the following results from last year’s operations