The following information applies to the questions displayed below Westerville C
ID: 2570369 • Letter: T
Question
The following information applies to the questions displayed below Westerville Company reported the following results from last year's operations: Salos $1,400,000 Varlable expenses 680,000 Contribution margin 720,000 Fixed expenses Net operating Income Average operating assets 440,000 $ 280,000 $ 875,000 This year, the company has a $300,000 Investment opportunity with the following cost and revenue characterlstics Sals Contribution margin ratio Fixed expenses $480,000 80 % of sales $336,000 The company's minimum required rate of return is 15%.Explanation / Answer
1. The Last Years Turnover is $1,400,000
2. The Last Year's Return on Investment:
Total Return = $280,000
Total Operating Asset = $875,000
Last Years' Return on Investment = 32% [280000/875000]
3. Turnover related to the current years investment opportunity = $480,000
4. Turnover in the current year if the company pursues the opportunity = $1,880,000 [$480,000 + $1,400,000]
5. Last Year's Residual Income
Formula, Residual Income = Net Income in last Year - Average Operating Assets * Rate of return
Residual Income = $280,000 - $875000 * 15%
Residual Income = $148750
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