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Home/ Questions/Westerville company reported the following results from last year's operations
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kttutoria
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kttutoriaExpert
Asked: April 10, 20222022-04-10T07:37:33+00:00 2022-04-10T07:37:33+00:00In: Accounting

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

  • 35

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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


♦ Relevant knowledge
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

incomeroi
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  1. Best Answer
    kttutoria Expert
    2022-04-17T03:38:42+00:00Added an answer on April 17, 2022 at 3:38 am

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  2. tonytutoria
    2022-04-10T07:37:35+00:00Added an answer on April 10, 2022 at 7:37 am

    (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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