Foundational [LO11-1, LO11-2] [The following information applies to the question

Question

Foundational [LO11-1, LO11-2] [The following information applies to the questions displayed below. Westerville Company reported the following results from last year's operations: Sales $2,300,000 Variable expenses 670,000 Contribution margin 1,630,000 Fixed expenses Net operating income Average operating assets 1,170,000 $460,000 $1,437,500 This year, the company has a $287,500 investment opportunity with the following cost and revenue characteristics: $460,000 Sales Contribution margin ratio Fixed expenses 50 % of sales $161,000 The company's minimum required rate of return is 15%.

Explanation / Answer

1) Last year's margin = net operating income / sales X 100 = 460000 / 2300000 X 100 = 20%

2) Last years turnover = sales / average operating assets = $ 230000 / $ 1437500 = 1.6

3) Return on investment = operating income / average operating assets = $ 460000 / $ 1437500 X 100 = 32% OR margin X turnover = 20 X 1.6 = 32%

4) Margin related to this year investment opportunity =current years's net operating income / current year's sales X 100

=460000 + ( 460000 - 230000 - 161000) / (2300000 +460000) X 100

= 529000 / 2760000 X100 = 19.17% i.e 19.2%

5) Turnover related to this year investment opportunity = current year sales / average operating assets

=(2300000 + 460000) / ( 1437500 + 287500)

= 2760000 / 1725000 = 1.6

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