4 Cirone Inc. reported the following results from last year\'s operations: Sales

Question

4 Cirone Inc. reported the following results from last year's operations: Sales Variable expenses Contribution margin Fixed expenses Net operating income Average operating assets $4,000,000 $9,600,000 6,810,000 2,790,000 1,926,000 $ 864,000 Print At the beginning of this year, the company has a $1,200,000 investment opportunity with the following characteristics: Sales Contribution margin ratio Fixed expenses $4,200,000 30% of sales $ 966,000 If the company pursues the investment opportunity and otherwise performs the same as last year, the combined margin for the entire company will be closest to

Explanation / Answer

4) Net Operating Income from new investment opportunity

= Contribution Margin - Fixed Expenses

= ($4,200,000*30%) - $966,000 = $1,260,000 - $966,000

= $294,000

Combined Net Operating Income = $864,000+$294,000 = $1,158,000

Combined Sales = Last year's Sales+Additional Sales

= $9,600,000+$4,200,000 = $13,800,000

Combined Margin = Combined Net Operating Income/Combined Sales

= $1,158,000/$13,800,000 = 8.39%

5) Return on investment is calculated by dividing net income by total assets, if there is a decrease in inventory then total assets will decrease and therefore return on investment will increase.

Residual Income is calculated by subtracting actual net income from minimum required income. Minimum required income is calculated by multiplying minimum rate of return with total operating assets. If there is a decrease in inventory, then minimum required income will decrease which results in increase of residual income.

Hence, return on investment and residual income both will increase if inventory decreases and all else remains the same. The correct option is A) Yes Yes

6) Return on Investment = Net Operating Income/Average Operating Assets

= $765,830/$5,100,000 = 15.02%

7) Minimum required return = Average Operating Assets*Minimum required rate of return

= $667,000*23% = $153,410

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.