Westerville Company reported the following results from last year’s operations:
Sales $ 1,300,000
Variable expenses 440,000
Contribution margin 860,000
Fixed expenses 600,000
Net operating income $ 260,000
Average operating assets $ 812,500
This year, the company has a $162,500 investment opportunity with the following cost and revenue characteristics:
Sales $ 260,000
Contribution margin ratio 80 % of sales
Fixed expenses $ 182,000
The company’s minimum required rate of return is 15%.
1. What is last year’s margin?
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?
Margin %
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?
ROI %
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))
MARGIN %
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?
Yes
No
10-b. Would the owners of the company want her to pursue the investment opportunity?
No
Yes
11. 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?
Yes
No
12-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
12-b. Would the owners of the company want her to pursue the investment opportunity?
No
Yes