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 $150,000 investment opportunity with the following cost and revenue characteristics:

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

5. What is the turnover related to this year’s investment opportunity? (Round your answer to 1 decimal place.)

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

7. 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))

8. 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.)

9. 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., 0.1234 should be considered as 12.3%.))

Sales $ 1,200,000 Variable expenses 320,000 Contribution margin 880,000 Fixed expenses 640,000 Net operating income $ 240,000 Average operating assets $ 600,000

Explanation / Answer

Req 5: Investment Opportunity in the beginning of year: $150,000 Average Operating Assets for the opportunity = $ 150,000 Sales revenue for the Opportunity = $ 240,000 Assets Turnover ratio = Sales Revenue / Average Operating Assets ( 240,000 /150,000 ) = 1.6 times Req 6: Sales Revenue of Opprtunity    =   $ 240,000 CM ratio is 50% of sales Total Contribution earned (240,000*50%) =       $ 120,000 Less: Fixed Expense                                         =       $ 84,000 Net Operating Income from the Opportunity = $ 36,000 Sales Margin = Net Operating Income/ Sales *100 ( 36,000 /240,000) *100 = 15% ROI = Assets turnover* Sales margin ( 1.6 times *15%) = 24% Req 7,8 and 9 Operations Operations Total Without Investment Investment Sales Revenue 1,200,000 240,000 1,440,000 Less: Variable expense 320,000 120,000 440,000 (240000*50%) Contribution Margin 880,000 120,000 1,000,000 Less: Fixed expense 640,000 84,000 724,000 Net Operating Income 240,000 36,000 276,000 Average Operating Assets 600,000 150,000 750,000 Sales margin 20.00% 15.00% 19.17% (Net Operating income/Net sales*100) Assets Turnover 2 1.6 1.92 (Net Sales/ Average Operating Investment) ROI 40% 24% 36.80% (Sales Margin ratio*Assets Turnover) Req 7: Sales margin of the company = 19.17% Req 8: Tunrover of the company = 1.92 times Req 9: ROI of the company =    36.80%

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