Question

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

Sales	$	1,900,000
Variable expenses		550,000
Contribution margin		1,350,000
Fixed expenses		875,000
Net operating income	$	475,000
Average operating assets	$	1,187,500

At the beginning of this year, the company has a $237,500 investment opportunity with the following cost and revenue characteristics:

Sales	$	380,000
Contribution margin ratio		50	% of sales
Fixed expenses	$	133,000

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

1. What is last year’s margin?

2. What is last year’s turnover? (Round your answer to 1 decimal place.)

3. What is last year’s return on investment (ROI)?

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

Margin = Net operating income /Sales

Turnover = Sales/Average operating assets

ROI = Margin*Turnover

1

Last year’s margin = 475000/1900000= 25%

2

Last year’s turnover = 1900000/1187500= 1.6

3

Return on investment (ROI) = 25%*1.6= 40%

4

Net operating income = (380000*50%)-133000= $57000

Margin related to this year’s investment opportunity = 57000/380000= 15%

5

Turnover related to this year’s investment opportunity = 380000/237500= 1.6