Westerville Company Reported the follwoing results from last years operations: S

Question

Westerville Company Reported the follwoing results from last years operations:

Sales.......$1,000,000.00

Variable Expenses........$300,000.00

Contribution Margin........$$700,000.00

Fixed Expenses.............$500,000.00

Net Operating Income......$200,000.00

Average Operating Assets........$625,000.00

This year the company has a $120,000.00 investment opportunity with the following cost revenue characteristics:

Sales.....$200,000.00

Contribution Margin Ratio........60% of sales.

Fixed Expenses.....$90,000.00

Questions:

1. What is last year's Margin?

2. What is last year's turnover?

3. What is last year's return on investment (ROI)?

4. What is the Margin related to this year's investment opportunity?

5. What is the turnover related to this year's investment opportunity?

6. What is the ROI related to this year's investment opportunity?

7. If the company pursues the investment opportunity and otherwise performs the same as last year, what margin will it earn this year?

8. If the company pursues the investment opportnity and otherwise performs the same as last year, what turnover will it earn this year?

9. IF the compmany pursues the investment opportunity and otherwise performs the same as last year, what ROI will it earn this year?

10. 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 pusue the investment opportunity? Would the owners of the company want her to puruse the investment opportunity?

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>

14. If Westerville's Chief Executive Officer will earn a hourly bonus only if her residual income from las year exceeeds her residual income from last year. Would she pursue the investment opportunity?

15. Assume that the contribution margin ratio fo the investment opportunity was P instead of `. If Westerville's Cheif 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 oppportunity? Would the owners of the company want her to pursue the investment opportunity?

Explanation / Answer

The following information is used to complete #2

The Clemson Company reported the following results last year for the manufacture and sale of one of its products known as a Tam.

Sales (6,500 TAMS at $130 each)..... $845,000

Variable cost of sales...........$390,000

Variable distribution costs....$65,000

Fixed advertising expense....$$275,000

Salary of product line manager....$25,000

Fixed Manufacturing overhead.....$145,000

= Net operating loss $(55,000)

Clemson Company is trying to determine whether or not to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tam product were dropped, there would be no change in the fixed manufacturing costs of the company.

2.) Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other product lines. If the company discontinues the Tam product line, the change in annual operating income (or loss) should be:

A. $55,000 decrease

B. $65,000 decrease

C. $90,000 decrease

D. $70,000 increase

Answer:

if Tam were dropped, there would be no sales and there would be no costs associated with it except for the $145,000 of fixed manufacturing overhead. Since the net operating loss was $55,000, the $145,000 would increase that loss by $90,000. So the answer is C.

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