What is the turnover related to this year’s investment opportunity? (Round your

ID: 2461149 • Letter: W

Question

What is the turnover related to this year’s investment opportunity? (Round your answer to 1 decimal place.) IT IS NOT $400,000.*

What is the residual income of this year’s investment opportunity?? IT IS NOT $35,000.*

Westerville Company reported the following results from last year's operations: Sales $2,000,000 Variable expenses 640,000 Contribution margin 1,360,000 Fixed expenses Net operating income Average operating assets 860,000 $500,000 1,250,000 This year, the company has a $250,000 investment opportunity with the following cost and revenue characteristics: $400,000 Sales Contribution margin ratio Fixed expenses 70 % of sales $220,000 The company's minimum required rate of return is 10%.

Explanation / Answer

Last year turnover = Sales

---------------------------------

Average operating assets

= 2,000,000

----------------

1,250,000

= 1.6

Turnover = Sales

---------------------------------

Average operating assets

= 2,000,000 + 400,000

---------------------------

1,250,000 + 250,000

= 1.6

Part 3

ROI = Margin * Turnover

= Net operating income

--------------------------------- *Turnover

Sales

10% = Net operating income

--------------------------------- *1.6

2,400,000

Net operating income = $ 150,000

The residual income for this year’s investment opportunity is:

Average operating assets................................

$250,000

Net operating income.......................................

$150000

Minimum required return:
10% × $250,000...........................................

25000

Residual income...............................................

$125000