Question


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



Sales$1,400,000
Variable expenses
510,000
Contribution margin
890,000
Fixed expenses
610,000
Net operating income$280,000
Average operating assets$875,000

At the beginning of this year, the company has a $175,000 investment opportunity with the following cost and revenue characteristics:



Sales$280,000
Contribution margin ratio
50% of sales
Fixed expenses$98,000

The company’s minimum required rate of return is 15%.

7. If the company pursues the investment opportunity and otherwise performs the same as last year, what margin will it earn this year? (Round your percentage answer to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

Homework Answers

Answer #1

7)

Last year New investment Total
Sales $ 14,00,000 $ 2,80,000 $ 16,80,000
Less: Variable cost
Last year $    5,10,000   
New opportunity (50%of sales) $ 1,40,000 $    6,50,000
Contribution Margin $    8,90,000 $ 1,40,000 $ 10,30,000
Less: Fixed Expenses $    6,10,000 $ 98,000 $    7,08,000
Net Operating Income $    2,80,000 $ 42,000 $    3,22,000

Margin = Net operating income / sales = $322000 / $1680000 = 19.17%

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