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 730,000 Contribution margin 770,000 Fixed expenses 470,000 Net operating income $ 300,000 Average operating assets $ 937,500 This year the company has a $362,500 investment opportunity with the following cost and revenue characteristics: Sales $ 580,000 Contribution margin ratio 70 % of sales Fixed expenses $ 319,000 The company’s minimum required rate of return is 10%.

Required: What is the margin related to this year’s investment opportunity?

Explanation / Answer

Sales = $580,000

Contribution = 70% x $580,000

.....................= $406,000

Fixed Expense = $319,000

Net Income = Contribution - Fixed Expense

....................= $406,000 - $319,000

....................= $87,000

Margin = $87,000 / $580,000

............= 15%

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