Question

Wolford Inc. reported the following results from last year's operations:

	Sales	$7,200,000
	Variable expenses	5,210,000
	Contribution margin	1,990,000
	Fixed expenses	1,486,000
	Net operating income	$504,000
	Average operating assets	$4,000,000

At the beginning of this year, the company has a $1,200,000 investment opportunity with the following characteristics:

	Sales	$1,560,000
	Contribution margin ratio	30%	of sales
	Fixed expenses	$343,200

The company's minimum required rate of return is 14%.

A): Compute last year's margin, turnover and ROI for Wolford. Show calculations (you may copy and paste from Excel).

B):If the company pursues the investment opportunity and otherwise performs the same as last year, what will be the overall ROI will this year? Show work.

C): If the Wolford's chief executive officer earns a bonus only if the ROI for this year exceeds the ROI for last year, would the CEO pursue the investment opportunity? Would the owners of the company want the CEO to pursue the investment opportunity? Explain.

Answer 1