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 690,000 Contribution margin 810,000 Fixed expenses 435,000 Net operating income $ 375,000 Average operating assets $ 1,250,000 This year, the company has a $350,000 investment opportunity with the following cost and revenue characteristics: Sales $ 420,000 Contribution margin ratio 70 % of sales Fixed expenses $ 252,000 The company’s minimum required rate of return is 10%.

What is the turnover related to this year’s investment opportunity? (Round your answer to 1 decimal place.)

What is the ROI related to this year’s investment opportunity?

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 .1234 should be entered as 12.3))

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.)

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., 0.1234 should be considered as 12.3%.))

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 pursue the investment opportunity?

Would the owners of the company want her to pursue the investment opportunity?

Explanation / Answer

Answer to the first 4 parts:

a) Turnover related to this year’s investment opportunity = $420,000 (given)

b) ROI related to this year’s investment opportunity = Net Operating income/Investment

= $42,000/$350,000 = 12%

c) Contribution margin ratio of last year = $810,000/$1,500,000 = 54%

The margin relating to the investment oppotunity will be:

$420,000 * 54% = $226,800

d)

Last year turnover in proportion to operating asset = $1,500,000/$1,250,000 = 120%

So the turnover relating to the investment opportunity will be = $350,000*120% = $420,000

Particulars Existing Investment opportunity In$ in $ Sales 1500000 420000 Less: Variable expenses 690000 Contribution margin 810000 294000 Less: Fixed Expenses 435000 252000 A Net operating income 375000 42000 B Average operating asset 1250000 C Investment opportunity 350000

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