Required information [The following information applies to the questions display

Question

Required information [The following information applies to the questions displayed below., Westerville Company reported the following results from last year's operations Sales Variable expenses Contribution margin Fixed expenses Net operating income Average operating assets 1,187,500 $ 1,900,000 550,000 1,350,000 875,000 $ 475, 000 At the beginning of this year, the company has a $237,500 investment opportunity with the following cost and revenue characteristics: Sales Contribution margin ratio Fixed expenses 380,000 50% of sales 133,000 The company's minimum required rate of return is 10%. 10-a. If Westerville's chief executive officer will earn a bonus only if her ROI from this year exceeds her ROl from last year, would she pursue the investment opportunity? O Yes O No 10-b. Would the owners of the company want her to pursue the investment opportunity? O Yes O No

Explanation / Answer

10 a. No

ROI from last year = 475000/1187500 *100 = 40%

Income from investment opportunity = 380000*50% - 133000 = 57000

ROI from this year = 475000+ 57000/1187500+237500 = 532000/1425000 = 37.33%

Ceo will not pursue the opportunity because ROI from this year will be less than ROI from last year if he pursues the investment opportunity.

10 b. Yes

Company minimum rate of return is 10%

Rate of return of investment opportunity = 57000/237500 = 24%

Since rate is return is greater than 10%, company would want to pursue the investment opportunity.

11. Residual income is 356250

Residual income is amount by which net income exceeds required rate of return.

Residual income = 475000 - 10% of 1187500 = 475000 - 118750 = 356250

12. Residual income of this year investment opportunity is 33250

Residual income = 57000 - 10% of 237500 = 57000-23750 = 33250

13. Residual income is 389500

Total residual income if company pursues investment opportumity = 33250 + 356250 = 389500

14.Yes

Ceo will pursue the investment opportunity because her residual income of this year i.e 389500 is greater than residual income from last year i.e 356250.

15.a No

If contribution margin is 40%, then net income of investment opportunity = 380000*40% - 133000 = 19000

Residual income of investment opportunity = 19000 - 10% of 237500 = 19000 - 23750= -4750

Residual income of this year = 356250 - 4750 = 351500

Since residual income of this year would be less than residual income of last year, CEO will not pursue the investment opportunity.

15 b. No

Rate of return of investment opportunity = 19000/237500*100

= 8%

Since rate of return is less than 10%, owners would not want her to pursue the investment opportunity.

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