Question

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

      
Sales   $   1,500,000
Variable expenses      690,000
Contribution margin      810,000
Fixed expenses      435,000
Net operating income   $   375,000
Average operating assets   $   1,250,000

At the beginning of this year, the company has a $350,000 investment opportunity with the following cost and revenue characteristics:

      
Sales   $   420,000     
Contribution margin ratio      70   % of sales
Fixed expenses   $   252,000     

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? (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

Net Operating Income Calculation of Investing Opportunity

Sales	420,000
Variable cost	-126,000
Contribution Margin	294,000
Fixed expenses	-252,000
Net Operating Income	$42,000

Total net operating income after pursuing investment opportunity = 375,000+42,000

= $417,000

Average operating asset after pursuing investment opportunity = 1,250,000+350,000

= $1,600,000

Return on Investment = Net operating income / Average operating assets

= 417,000/1,600,000

= 26.1%

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