80.2K

Verified Solution

Link Copied!

Westerville Company reported the following results from last years operations:

At the beginning of this year, the company has a $400,000 investment opportunity with the following cost and revenue characteristics:

The companys minimum required rate of return is 10%.

Required:

1. What is last years margin?

2. What is last years turnover?

3. What is last years return on investment (ROI)?

4. What is the margin related to this years investment opportunity?

5. What is the turnover related to this years investment opportunity?

6. What is the ROI related to this years investment opportunity?

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 .1234 should be entered as 12.3))

8. If the company pursues the investment opportunity and otherwise performs the same as last year, what turnover will it earn this year? (Round your answer to 2 decimal places.)

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

10-a. If Westervilles chief executive officer will earn a bonus only if her ROI from this year exceeds her ROI from last year, would she pursue the investment opportunity?

10-b. Would the owners of the company want her to pursue the investment opportunity?

11. What is last years residual income?

12. What is the residual income of this years investment opportunity?

13. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?

14. If Westervilles chief executive officer will earn a bonus only if her residual income from this year exceeds her residual income from last year, would she pursue the investment opportunity?

15-a. Assume that the contribution margin ratio of the investment opportunity was 50% instead of 60%. If Westervilles Chief Executive Officer will earn a bonus only if her residual income from this year exceeds her residual income from last year, would she pursue the investment opportunity?

15-b. Would the owners of the company want her to pursue the investment opportunity?

Sales Variable expenses Contribution margin Fixed expenses Net operating income $ 1,800,000 740,000 1,060,000 700,000 $ 360,000 Average operating assets $ 1,200,000 Sales Contribution margin ratio Fixed expenses $ 600,000 60% of sales $ 288,000

Answer & Explanation Solved by verified expert

See Answer