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 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.)
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
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 opportunityYes
No
Yes
No
15-b. Would the owners of the company want her to pursue the investment opportunity?
Yes
No
Total Sales = 1,000,000+200,000 = $1,200,000
Turnover Ratio= Sales/average operating assets
= (1,000,000+200,000)/(625000+120000)
= 1.6107 times
10.ROI last year = Net Operating Income/Average Operating assets
= 200,000/625000
= 32%
After investment = (200,000+30000)/745000
= 30.87%
No
10-b Yes, since the ROI is higher than the minimum required return
14.Yes
Since residual income from new investment = 30,000 – 120,000*15%
= $12,000
15-a.
Residual income from new investment = 200,000*50% -90,000 – 120,000*15%
= -$8000
NO
15-b NO
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