Question

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

	Sales	$12,600,000
	Variable expenses	9,380,000
	Contribution margin	3,220,000
	Fixed expenses	2,716,000
	Net operating income	$504,000
	Average operating assets	$7,000,000

At the beginning of this year, the company has a $800,000 investment opportunity with the following characteristics:

	Sales	$560,000
	Contribution margin ratio	50% of sales
	Fixed expenses	$246,400

5.aIf the company pursues the investment opportunity and otherwise performs the same as last year, what will be the overall turnover this year? (Round to the nearest 0.01.)

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? (Round to the nearest 0.1%.)

Answer 1

• All working forms part of the answer
• Working

	Normal	Investment opportunity	Total
Sales	$12600000	$560000	$13160000
(-) Variable expenses	$9380000	$280000	$9660000
Contribution margin	$3220000	$280000	$3500000
(-) Fixed expenses	$2716000	$246400	$2962400
Net operating income	$504,000	$33,600	$537,600
Average operating assets	$7,000,000	$800,000	$7,800,000

• Answer ‘a’

Total Turnover will be $13,160,000 [total sales revenue calculated above]

• Answer ‘b’

Overall ROI = Net Income [overall] / Average operating assets [overall]

= $537,600 / $7,800,000

= 6.89% or 6.9%