1. If the company pursues the investment opportunity and otherwise performs the

Question

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

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

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

4. What is last year’s residual income?

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

The Foundational 15 [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 Variable expenses Contribution margin Fixed expenses Net operating income $1,200,000 420,000 780,000 600,000 $180,000 Average operating assets 600,000 At the beginning of this year, the company has a $137,500 investment opportunity with the following cost and revenue characteristics Sales Contribution margin ratio Fixed expenses $ 220,000 60% of sales $ 99,000 The company's minimum required rate of return is 20%.

Explanation / Answer

Net operating income new investment opportunity=(220000*60%)-99000=$33000 1 Margin = Net operating income/Sales=(180000+33000)/(1200000+220000)= 15% 2 Turnover = Sales/ Average operating assets = (1200000+220000)/(600000+137500)= 1.93 (rounded off) 3 ROI = Margin*Turnover = 15%*1.93= 29.0% (rounded off) 4 Last year’s residual income=180000-(600000*20%)= $60000 5 Residual income of this year’s investment opportunity=33000-(137500*20%)= $5500

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