Question

[The following information applies to the questions displayed below.]

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%.

6. What is the ROI related to this year’s investment opportunity? (Do not round intermediate calculations.)

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., 0.1234 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? (Do not round intermediate calculations. Round your percentage answer to 1 decimal place (i.e., 0.1234 should be considered as 12.3).)

Answer 1

6
Net Operating income	44000	=(440000*60%)-220000
Divide by Average operating assets	275000
ROI	16%
7
Net operating income	484000	=440000+44000
Divide by Sales	2640000	=2200000+440000
Margin	18.3%
8
Sales	2640000	=2200000+440000
Divide by Average operating assets	1650000	=1375000+275000
Turnover	1.60
9
Net operating income	484000	=440000+44000
Divide by Average operating assets	1650000	=1375000+275000
ROI	29.3%