Question

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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

At the beginning of 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%

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

6. What is the ROI related to this year’s investment opportunity? (Do not round intermediate calculations.)

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., 0.1234 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? (Do not round intermediate calculations. Round your percentage answer to 1 decimal place (i.e., 0.1234 should be considered as 12.3).)

Answer 1

- X100 Answex'- i profit margin Ratio - ~ Net Income --X100 Net sales - $ 26,000 $200,000 = 10%. Working Notes: Net income = contribution - Fixed expenses = 80% of sales - $ 188,006 = ($ 260,000 X 80%) – $189,000 = $ 26,000 2. Return on investment Assels turnover x Net profit margin = 1.6X10%. = 0.16 or 16% working Notes: Assets turnovers Net sales Average Total Assets = 1,300,000 812,500 1.6 times Combined maroin Net income of last year + Net income of current year Last year sales t current year sales. = $260,000+$26,000 $1,300,000+ $ 260,000 combined Margin = 18.3%. 8 Combined Assets = Last year solest Current year net sales Turnover Last year aug-totalassetst Current year ang total avets = $1,300,000 + $ 260,000 $ 812,500 +$ 162,500 - 1.6 times @- Return on Jou Return on Inuestment = Gmbined assets turnover X Gmbined Ne margin = 1.6 X 18:37 = 29.3%