Required information The Foundational 15 [LO11-1, L011-2 The following informati

Question

Required information The Foundational 15 [LO11-1, L011-2 The following information applies to the questions displayed below. Westerville C ompany reported the following results from last year's operations: Sales Variable expenses Contribution margin Fixed expenses Net operating income s1,500,000 730,000 770,000 470,000 $ 300,000 Average operating assets 937,500 At the beginning of this year, the company has a $362,500 investment opportunity with the following cost and revenue characteristics: Sales Contribution margin ratio Fixed expenses 580,000 70% of sales 319,000 The company's minimum required rate of return is 10%. Required: 1. What is last year's margin? 2. What is last year's turnover? (Round your answer to 1 decimal place.) 3. What is last year's return on investment (ROI)? ROI 4. What is the margin related to this year's investment opportunity?

Explanation / Answer

SOLUTION

1. Last year margin-

Margin = Net Operating Income / Sales

= $300,000 / $1,500,000

= 20%

2. Last year's turnover -

Turnover = Sales / Average operating assets

= $1,500,000 / $937,500

= 1.6

3. Last year’s return on investment (ROI)-

ROI = Margin * Turnover

= 20% * 1.6

= 32%

4. The margin for this year’s investment opportunity-

Margin = Net Operating Income / Sales

= $87,000 / $580,000

=15%

Net operating income = ($580,000*70%) - $319,000

= $406,000 - $319,000 = $87,000

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