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 8. 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.)

9. 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%.))

11. What is last year’s residual income?

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

13. 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

Turnover = $1500000+$580000 = $2080000/-

ROI % Last Year = Operating Income / Operating Assets

= 300000/937500

= 32%

ROI of new invertment = 87000 - 362500*32% = -29000

RI = Operating Income - (Operating Assets x Target Rate of Return)

= 300000-(937500*32%)

= 0

RI overall = 387000-(1300000*32%) = -29000

Refer Table :-

Existing New Total Sales (Turnover) 1500000 580000 2080000 Variable -730000 -174000 -904000 Contribution 770000 406000 1176000 Fixed -470000 -319000 -789000 operating Profit 300000 87000 387000 Assets 937500 362500 1300000 ROI % 32.00% 32.00% 32.00% ROI 300000 116000 416000 RI 0 -29000 -29000

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