Westerville Company reported the following results from last year’s operations:

Question

Westerville Company reported the following results from last year’s operations:

Sales $ 1,300,000

Variable expenses 440,000

Contribution margin 860,000

Fixed expenses 600,000

Net operating income $ 260,000

Average operating assets $ 812,500

This year, the company has a $162,500 investment opportunity with the following cost and revenue characteristics: Sales $ 260,000

Contribution margin ratio 80 % of sales

Fixed expenses $ 182,000

The company’s minimum required rate of return is 15%.

What is last year’s margin?

What is last year’s turnover?

What is last year’s return on investment (ROI)?

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

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

What is the ROI related to this year’s investment opportunity?

If the company pursues the investment opportunity and otherwise performs the same as last year, what margin will it earn this year? (Round your percentage answer to 1 decimal place (i.e .1234 should be entered as 12.3))

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.)

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 .1234 should be entered as 12.3))

What is last year’s residual income?

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

If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?

What is last year’s margin?

What is last year’s turnover?

What is last year’s return on investment (ROI)?

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

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

What is the ROI related to this year’s investment opportunity?

If the company pursues the investment opportunity and otherwise performs the same as last year, what margin will it earn this year? (Round your percentage answer to 1 decimal place (i.e .1234 should be entered as 12.3))

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.)

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 .1234 should be entered as 12.3))

What is last year’s residual income?

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

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

Last year margin= Net operating income/sales=260,000/1,300,000=20%
Turnover= sales/assets=1,300,000/812,500=1.6
ROI=Net operating income/Avearge operating assets=260,000/812,500=32%

Last year margin= Net operating income/sales=[(0.8*260000)-182000)]/260,000=10%
Turnover= sales/assets=260,000/162,500=1.6
ROI=Net operating income/Avearge operating assets=[(0.8*260000)-182000)]/162,500
=16%

this time we have to add both the years numbers togethr and see.

margin=Net operating income/sales=((0.8*260000)-182000+260000)/(260000+1300000)=18.33%
Turnover= sales/assets=(1,300,000+260000)/(812,500+162500)=1.6
ROI=Net operating income/Avearge operating assets=((0.8*260000)-182000+260000)/(812,500+162500)
=29.33%

Residulal return( 1st case)= Operating Income - (Operating Assets x Target Rate of Return)

=260,000-(812,500*15%)=138,125

Residulal return( 2nd case)= Operating Income - (Operating Assets x Target Rate of Return)

=26000-(162500*0.15)=1,625

Residulal return( 3rd case)= Operating Income - (Operating Assets x Target Rate of Return)

=139,750

=(260000+26000(-(162500+812500)*0.15)=

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