Westerville Company reported the following results from last year’s operations: Sales $ 1,200,000 Variable expenses 320,000 Contribution margin 880,000 Fixed expenses 640,000 Net operating income $ 240,000 Average operating assets $ 600,000 At the beginning of this year, the company has a $150,000 investment opportunity with the following cost and revenue characteristics: Sales $ 240,000 Contribution margin ratio 50 % of sales Fixed expenses $ 84,000 The company’s minimum required rate of return is 15%.
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?
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?
Part-1 |
Net Operating Income from new Investment Opportunity = Contribution Margin- Fixed Expense |
( 240000X 50%)-84000=$36000 |
Existing Net Operating Income = $240000 |
New Net Operating Inocome = 360000+240000=276000 |
Existing ROI= 240000/600000=40% |
New ROI= 276000/750000=36.8% |
No, he will not persued this opportunity |
Part-2 |
Residual Income = Net Operating Income - ( Average Investment X Required Return) |
240000-(600000X 15%)=$150000 |
Part-3 |
Residual Income = Net Operating Income - ( Average Investment X Required Return) |
276000-(750000*15%)=$163500 |
Westerville Company reported the following results from last year’s operations: Sales $ 1,200,000 Variable expenses 320,000...
Westerville Company reported the following results from last year’s operations: Sales $ 1,200,000 Variable expenses 320,000 Contribution margin 880,000 Fixed expenses 640,000 Net operating income $ 240,000 Average operating assets $ 600,000 At the beginning of this year, the company has a $150,000 investment opportunity with the following cost and revenue characteristics: Sales $ 240,000 Contribution margin ratio 50 % of sales Fixed expenses $ 84,000 The company’s minimum required rate of return is 15%. 10-a. If Westerville’s chief executive...
Westerville Company reported the following results from last year’s operations: Sales $ 1,200,000 Variable expenses 320,000 Contribution margin 880,000 Fixed expenses 640,000 Net operating income $ 240,000 Average operating assets $ 600,000 At the beginning of this year, the company has a $150,000 investment opportunity with the following cost and revenue characteristics: Sales $ 240,000 Contribution margin ratio 50 % of sales Fixed expenses $ 84,000 The company’s minimum required rate of return is 15%. 14. If Westerville’s chief executive...
Westerville Company reported the following results from last year’s operations: Sales $ 1,200,000 Variable expenses 320,000 Contribution margin 880,000 Fixed expenses 640,000 Net operating income $ 240,000 Average operating assets $ 600,000 At the beginning of this year, the company has a $150,000 investment opportunity with the following cost and revenue characteristics: Sales $ 240,000 Contribution margin ratio 50 % of sales Fixed expenses $ 84,000 The company’s minimum required rate of return is 15%. 14. If Westerville’s chief executive...
Westerville Company reported the following results from last year’s operations: Sales $ 1,200,000 Variable expenses 320,000 Contribution margin 880,000 Fixed expenses 640,000 Net operating income $ 240,000 Average operating assets $ 600,000 At the beginning of this year, the company has a $150,000 investment opportunity with the following cost and revenue characteristics: Sales $ 240,000 Contribution margin ratio 50 % of sales Fixed expenses $ 84,000 The company’s minimum required rate of return is 15%. 5. What is the turnover...
Westerville Company reported the following results from last year’s operations: Sales $ 1,000,000 Variable expenses 300,000 Contribution margin 700,000 Fixed expenses 500,000 Net operating income $ 200,000 Average operating assets $ 625,000 At the beginning of this year, the company has a $120,000 investment opportunity with the following cost and revenue characteristics: Sales $ 200,000 Contribution margin ratio 60 % of sales Fixed expenses $ 90,000 The company’s minimum required rate of return is 15%. 8. If the company pursues...
Westerville Company reported the following results from last year’s operations: Sales $ 1,800,000 Variable expenses 435,000 Contribution margin 1,365,000 Fixed expenses 1,005,000 Net operating income $ 360,000 Average operating assets $ 1,200,000 At the beginning of this year, the company has a $300,000 investment opportunity with the following cost and revenue characteristics: Sales $ 360,000 Contribution margin ratio 70 % of sales Fixed expenses $ 216,000 The company’s minimum required rate of return is 10%. 11. What is last year’s...
Westerville Company reported the following results from last year’s operations: Sales $ 1,000,000 Variable expenses 300,000 Contribution margin 700,000 Fixed expenses 500,000 Net operating income $ 200,000 Average operating assets $ 625,000 At the beginning of this year, the company has a $120,000 investment opportunity with the following cost and revenue characteristics: Sales $ 200,000 Contribution margin ratio 60 % of sales Fixed expenses $ 90,000 The company’s minimum required rate of return is 15%. Foundational 10-10 10-a. If Westerville’s...
Westerville Company reported the following results from last year’s operations: Sales $ 1,800,000 Variable expenses 435,000 Contribution margin 1,365,000 Fixed expenses 1,005,000 Net operating income $ 360,000 Average operating assets $ 1,200,000 At the beginning of this year, the company has a $300,000 investment opportunity with the following cost and revenue characteristics: Sales $ 360,000 Contribution margin ratio 70 % of sales Fixed expenses $ 216,000 The company’s minimum required rate of return is 10%. 6. What is the ROI...
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...
Westerville Company reported the following results from last year’s operations: Sales- 1,600,000 Variable expenses-700,000 Contribution margin-900,000 Fixed expenses-660,000 Net operating income-240,000 Average operating assets-1,000,000 At the beginning of this year, the company has a $325,000 investment opportunity with the following cost and revenue characteristics: Sales-520,000 Contribution margin ratio-70% of sales Fixed expenses-312,000 The company’s minimum required rate of return is 15%. A) What is last year’s margin? B) What is last year’s return on investment (ROI)? C) What is the...