2. What is the turnover related to this year’s investment opportunity? 3. What i
ID: 2471271 • Letter: 2
Question
2.
What is the turnover related to this year’s investment opportunity?
3.
What is the ROI related to this year’s investment opportunity?
4.
If the company pursues the investment opportunity and otherwise performs the same as last year, what margin will it earn this year?
5.
If the company pursues the investment opportunity and otherwise performs the same as last year, what turnover will it earn this year?
6.
If the company pursues the investment opportunity and otherwise performs the same as last year, what ROI will it earn this year?
7.
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? (YES OR NO) AND Would the owners of the company want her to pursue the investment opportunity?(YES OR NO)
8.
What is last year’s residual income?
9.
What is the residual income of this year’s investment opportunity?
10.
If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?
11.
If Westerville’s chief executive officer will earn a bonus only if her residual income from this year exceeds her residual income from last year, would she pursue the investment opportunity? (YES OR NO)
12.
Assume that the contribution margin ratio of the investment opportunity was 65% instead of 70%. If Westerville’s Chief Executive Officer will earn a bonus only if her residual income from this year exceeds her residual income from last year, would she pursue the investment opportunity? (YES OR NO) AND Would the owners of the company want her to persue the investment? (YES OR NO)
Thanks! :D
What is the margin related to this year’s investment opportunity? Westerville Company reported the following results from last year's operations: Sales $1,800,000 Variable expenses 435,000 Contribution margin 1,365,000 Fixed expenses Net operating income Average operating assets 1,005,000 360,000 1.200,000 This year, the company has a $300,000 investment opportunity with the following cost and revenue characteristics: Sales Contribution margin ratio Fixed expenses $360,000 70 % of sales $216,000 The company's minimum required rate of return is 10%.Explanation / Answer
Sales - $360,000
Contribution margin ratio is 70% of Sales = $360,000 * 70% = $252,000
Fixed Expenses - $216,000
Net Operating Income = $252,000 - $216,000 = $36,000
Margin = Net Operating Income/ Sales = $36,000/$360,000 = 10%
So the Margin related to this year’s investment opportunity is 10%.
2. Turnover of this year’s investment is calculated using the formula
Sales/Average operating assets
Sales - $360,000
Current year investment cost can be taken as Average Operating assets i.e. $300,000
So the Turnover of this year’s investment = $360,000/$300,000 = 1.2
3. ROI for this year’s investment is calculated using the formula
Margin * Turnover
From the values calculated in 1 and 2 above ROI = 10% * 1.2 = 12%
4. If the company pursues the investment opportunity, then Margin will be
($360,000 + $36,000)/ ($1,800,000 + $360,000) = $396,000/$2,160,000 = 18.33%
5. If the company pursues the investment opportunity, then turnover will be
($1,800,000 + $360,000)/ ($1,200,000 + $300,000) = $2,160,000/$1,500,000 = 1.44.
6. If the company pursues the investment opportunity, then ROI will be
18.33% * 1.44 = 26.40% (Rounded off to 2 decimals)
7. First let us calculate ROI of previous year.
Margin of previous year = $360,000/$1,800,000 = 20%
Turnover of previous year = $1,800,000/$1,200,000 = 1.5
ROI = 20% * 1.5 = 30%
ROI of current year if investment is pursued, is 26.40% and previous year is 30%. If the CEO receives bonus only if the ROI is more than the previous year, then she would not pursue the investment. So the answer is NO. The Owners would want her to pursue the investment because the ROI 26.4% is more than the minimum required rate of return of 10%. So the answer is YES.
8. Last year Average Operating Assets = $1,200,000
Net Operating Income = $360,000
Minimum required return = 10% of $1,200,000 = $120,000
Residual Income = $360,000 - $120,000 = $240,000.
9. This year investment opportunity’s average operating assets = $300,000
Net Operating Income = $36,000
Minimum required return = 10% of $300,000 = $30,000
Residual Income = $36,000 - $30,000 = $6,000
10. If the company pursues investment, then
Average operating assets = $1,200,000 + $300,000 = $1,500,000
Net Operating Income = $360,000 + $36,000 = $396,000
Minimum required return = 10% of $1,500,000 = $150,000
Residual income = $396,000 - $150,000 = $246,000
11. The CEO would want to pursue the investment, because the Residual income will increase from $240,000 to $246,000 and she will earn bonus. So the answer is YES.
12. If the contribution margin ratio is 65%, then net operating income will be as follows
(Sales * contribution margin ratio) – fixed expenses = ($360,000 * 65%) - $216,000 = $234,000 - $216,000 = $18,000
Residual Income will be $18,000 - $30,000 = -$12,000
If the investment is pursued, then the residual income will decrease, so CEO will not pursue this investment. The answer is NO. The owners also would not want to pursue the investment, because the residual income is negative. That means, the investment will not give minimum required return. So the answer is NO.
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