Question

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

Sales	$	1,500,000
Variable expenses		730,000
Contribution margin		770,000
Fixed expenses		470,000
Net operating income	$	300,000
Average operating assets	$	937,500

This year, the company has a $362,500 investment opportunity with the following cost and revenue characteristics:

Sales	$	580,000
Contribution margin ratio		70	% of sales
Fixed expenses	$	319,000

The company’s minimum required rate of return is 10%.

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 .1234 should be entered as 12.3))

      

10-a.

If Westerville’s chief executive officer will earn a bonus only if her ROI from this year exceeds her ROI from last year, would she pursue the investment opportunity?

	Yes
	No

10-b.

Would the owners of the company want her to pursue the investment opportunity?

	Yes
	No

11.	What is last year’s residual income?

12.	What is the residual income of this year’s investment opportunity?

13.	If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?

      

14.

If Westerville’s chief executive officer will earn a bonus only if her residual income from this year exceeds her residual income from last year, would she pursue the investment opportunity?

	No
	Yes

15-a.

Assume that the contribution margin ratio of the investment opportunity was 60% instead of 70%. If Westerville’s Chief Executive Officer will earn a bonus only if her residual income from this year exceeds her residual income from last year, would she pursue the investment opportunity?

	No
	Yes

15-b.

Would the owners of the company want her to pursue the investment opportunity?

	Yes
	No

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Bottom of Form

Answer 1

Last year ROI =net income /operating assets *100

=$300,000/$937500*100=32 percent or 0.32

RI= operating adsets*(ROI-min rate)

$937500*(0.32-0.1)=$206250

This year when you consider the investment opportunity of $362500

Sales $580,000

Contribution 70percent is sales =$406000

Net income =contribution -fixrd cost

= $406000-319000=$87000

ROI =$87000/$362500=0.24 or 24 percent

RI = 362500*(0.24-0 1)=$50750

If you considered the contribution margin 60 instead of 70 percent

Sales =580,000

Contribution = 60percent of sales $348000

Net income =348000-319000=$29000

ROI=$29000/362500=0 08

RI = 362500*(0 08-0.1)=- 7250

10) a no

10b no

11) 206250 see above calculations

12) $50750 see above

13a. See above  

14) no

15 no