Question

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

Sales	$	2,200,000
Variable expenses		660,000
Contribution margin		1,540,000
Fixed expenses		1,100,000
Net operating income	$	440,000
Average operating assets	$	1,375,000

At the beginning of this year, the company has a $275,000 investment opportunity with the following cost and revenue characteristics:

Sales	$	440,000
Contribution margin ratio		60	% of sales
Fixed expenses	$	220,000

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

Required:

1. What is last year’s margin?

3. What is last year’s return on investment (ROI)? (Round your intermediate calculations to 1 decimal place.)

4. What is the margin related to this year’s investment opportunity?

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

Answer 1

1)Margin

Last year Margin = net operating income/sales×100

=. $440000/$2200000× 100

= 20%

2) return on investment

Last year return on investment = NET OPERATING INCOME/ average operating assets

= $440000/$1375000×100

= 32%

3) margin related to this year investment opportunity

NET income = $440000×60% - $220000 = $44000

Margin = $44000/$440000× 100= 10%

4) turnover related to this year investment opportunity

Turnover = sales/average operating assets

= $440000/$275000

= 1.6

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