Westerville Company reported the following results from last year's operations:
Sales $1,200,000
Variable Expenses $ 420,000
Contribution Margin $ 780,000
Fixed Expenses $ 600,000
Net Operating Income $ 180,000
Average operating assets $ 600,000
At the beginning of this year, the company has a $137,500 investment opportunity with the following cost and revenue characteristics:
Sales $220,000
Contribution Margin Ratio 60% of sales
Fixed Expenses $99,000
The company's required rate of return is 20%.
Required:
1. What is last year's residual income?
2. What is the residual income of this year's investment opportunity?
3. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?
4. If Westerville's 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? Yes or No?
5.a. Assume that the contribution margin ratio of the investment opportunity was 50% instead of 60%. If Westerville’s 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? Yes or No?
5.b. Would the owners of the company want her to pursue the investment opportunity? Yes or No?
Westerville Company reported the following results from last year's operations:
Sales $1,200,000
Variable Expenses $ 420,000
Contribution Margin $ 780,000
Fixed Expenses $ 600,000
Net Operating Income $ 180,000
Average operating assets $ 600,000
At the beginning of this year, the company has a $137,500 investment opportunity with the following cost and revenue characteristics:
Sales $220,000
Contribution Margin Ratio 60% of sales
Fixed Expenses $99,000
The company's required rate of return is 20%.
Required:
1. What is last year's residual income?
2. What is the residual income of this year's investment opportunity?
3. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?
4. If Westerville's 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? Yes or No?
5.a. Assume that the contribution margin ratio of the investment opportunity was 50% instead of 60%. If Westerville’s 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? Yes or No?
5.b. Would the owners of the company want her to pursue the investment opportunity? Yes or No?
Related questions
[The following information applies to the questionsdisplayed below.]
Westerville Company reported the following results from lastyearâs operations: |
| Sales | $ | 1,500,000 |
| Variableexpenses | 730,000 | |
| Contributionmargin | 770,000 | |
| Fixed expenses | 470,000 | |
| Net operatingincome | $ | 300,000 |
| Average operatingassets | $ | 937,500 |
This year, the company has a $362,500 investment opportunitywith the following cost and revenue characteristics: |
| Sales | $ | 580,000 | |
| Contribution marginratio | 70 | % of sales | |
| Fixed expenses | $ | 319,000 | |
| The companyâs minimum requiredrate of return is 10%. | ||||||||||
|
Westerville Company reported the following results from lastyearâs operations: |
| Sales | $ | 1,200,000 |
| Variable expenses | 320,000 | |
| Contribution margin | 880,000 | |
| Fixed expenses | 640,000 | |
| Net operating income | $ | 240,000 |
| Average operating assets | $ | 600,000 |
This year, the company has a $150,000 investment opportunitywith the following cost and revenue characteristics: |
| Sales | $ | 240,000 | |
| Contribution margin ratio | 50 | % of sales | |
| Fixed expenses | $ | 84,000 | |
| The companyâs minimum required rate of return is15%. |
| 1. | What is last yearâs margin? |
| 2. | What is last yearâs turnover? (Round your answer to 1decimal place.) |
| 3. | What is last yearâs return on investment (ROI)? |
| 4. | What is the margin related to this yearâsinvestment opportunity? |
| 5. | What is the turnover related to this yearâs investmentopportunity? (Round your answer to 1 decimalplace.) |
| 6. | What is the ROI related to this yearâs investmentopportunity? |
| 7. | If the company pursues the investment opportunity and otherwiseperforms the same as last year, what margin will it earn this year?(Round your percentage answer to 1 decimal place (i.e .1234should be entered as 12.3)) |
| 8. | If the company pursues the investment opportunity and otherwiseperforms the same as last year, what turnover will it earn thisyear? (Round your answer to 2 decimal places.) |
| 9. | If the company pursues the investment opportunity and otherwiseperforms the same as last year, what ROI will it earn this year?(Round your percentage answer to 1 decimal place (i.e .1234should be entered as 12.3)) |
| 10-a. | If Westervilleâs chief executive officer will earn a bonus onlyif her ROI from this year exceeds her ROI from last year, would shepursue the investment opportunity? | ||||
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| 10-b. | Would the owners of the company want her to pursue theinvestment opportunity? | ||||
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| 11. | What is last yearâs residual income? |
| 12. | What is the residual income of this yearâs investmentopportunity? |
| 13. | If the company pursues the investment opportunity and otherwiseperforms the same as last year, what residual income will it earnthis year? |
| 14. | If Westervilleâs chief executive officer will earn a bonus onlyif her residual income from this year exceeds her residual incomefrom last year, would she pursue the investment opportunity? | ||||
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| 15-a. | Assume that the contribution margin ratio of the investmentopportunity was 40% instead of 50%. If Westervilleâs ChiefExecutive Officer will earn a bonus only if her residual incomefrom this year exceeds her residual income from last year, wouldshe pursue the investment opportunity? | ||||
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| 15-b. | Would the owners of the company want her to pursue theinvestment opportunity? | ||||
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