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 10-4
a. What is the margin related to this year’s investment opportunity?
b. 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).)
c. 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.)
d. 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 entered as 12.3).)
Net operating income (investment opportunity) = (200000*60%)-90000 = 30000
a) Margin = Net operating income/Sales = 30000/200000 = 15%
b) Margin = 230000/1200000 = 19.2%
c) Turnover = Sales/Average operating assets = 1200000/745000 = 1.61
d) ROI = 230000/745000 = 30.9%
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