Westerville Company reported the following results from last year’s operations:

Question

Westerville Company reported the following results from last year’s operations: Sales $ 1,500,000 Variable expenses 530,000 Contribution margin 970,000 Fixed expenses 670,000 Net operating income $ 300,000 Average operating assets $ 937,500 This year, the company has a $212,500 investment opportunity with the following cost and revenue characteristics: Sales $ 340,000 Contribution margin ratio 70 % of sales Fixed expenses $ 187,000 The company’s minimum required rate of return is 10%.

The question is  

If the company pursues the investment opportunity and otherwise performs the same as last year, what ROI will it earn this year? (Round your percentage answer to 1 decimal place (i.e .1234 should be entered as 12.3))

What is the residual income of this year’s investment opportunity?

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

If the company pursues the investment opportunity and otherwise performs the same as last year, what ROI will it earn this year? (Round your percentage answer to 1 decimal place (i.e .1234 should be entered as 12.3))

What is the residual income of this year’s investment opportunity?

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

Explanation / Answer

Statement showing computations Particulars Existing New Sales              1,500,000.00                                       1,840,000.00 Variable Exp                 530,000.00                                          632,000.00 Contribution                 970,000.00                                       1,208,000.00 Fixed Costs                 670,000.00                                          857,000.00 Income                 300,000.00                                          351,000.00 Average Operating Assets                 937,500.00                                       1,150,000.00 ROI = Income/Avg Operating Assets 32.00% 30.52% Statement showing computations Particulars Amount Income from invt oppurtunity = 351000 -300000                    51,000.00 Required income = 212,500*.10                    21,250.00 Residual Income from Invt opp = 51000 - 21250                    29,750.00 Statement showing computations Particulars Amount Income                   351,000.00 Required income = 1,150,000*.10                 115,000.00 Residual Income = 351000 - 115000                 236,000.00

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