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

Question

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

At the beginning of this year, the company has a $325,000 investment opportunity with the following cost and revenue characteristics:

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

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?

Sales $ 1,600,000 Variable expenses 700,000 Contribution margin 900,000 Fixed expenses 660,000 Net operating income $ 240,000 Average operating assets $ 1,000,000

Explanation / Answer

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

Net income = (520000*70%-312000)+240000 = 292000

Sales = 1600000+520000 = 2120000

Margin = 292000*100/2120000 = 13.77%

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

Average assets = 1000000+325000 = 1325000

Turnover = 2120000/1325000 = 1.6

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

ROI = 292000*100/1325000 = 22.04%

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