Sales.......$1,000,000.00 Variable Expenses........$300,000.00 Contribution Marg

Question

                    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                 

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

  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?                 

Explanation / Answer

Required rate of return = Total net operating income/Total revenue
Required rate of return = (200000 + 200000 x 0.6 - 90000) / 1200000 = 19.16%

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