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Homework answers / question archive / Westerville Company reported the following results from last year’s operations: Sales $ 1,400,000 Variable expenses 680,000 Contribution margin 720,000 Fixed expenses 440,000 Net operating income $ 280,000 Average operating assets $ 875,000 This year, the company has a $300,000 investment opportunity with the following cost and revenue characteristics: Sales $ 480,000 Contribution margin ratio 80 % of sales Fixed expenses $ 336,000 The company’s minimum required rate of return is 15%
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Westerville Company reported the following results from last year’s operations: |
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Sales |
$ |
1,400,000 |
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Variable expenses |
680,000 |
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Contribution margin |
720,000 |
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Fixed expenses |
440,000 |
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Net operating income |
$ |
280,000 |
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Average operating assets |
$ |
875,000 |
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This year, the company has a $300,000 investment opportunity with the following cost and revenue characteristics: |
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Sales |
$ |
480,000 |
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Contribution margin ratio |
80 |
% of sales |
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Fixed expenses |
$ |
336,000 |
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The company’s minimum required rate of return is 15%. |
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Required: |
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1. |
What is last year’s margin? |
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2. |
What is last year’s turnover? (Round your answer to 1 decimal place.) |
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3. |
What is last year’s return on investment (ROI)? |
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4. |
What is the margin related to this year’s investment opportunity? |
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5. |
What is the turnover related to this year’s investment opportunity? (Round your answer to 1 decimal place.) |
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6. |
What is the ROI related to this year’s investment opportunity? |
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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)) |
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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.) |
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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 .1234 should be entered as 12.3)) |
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10-a. |
If Westerville’s 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? |
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10-b. |
Would the owners of the company want her to pursue the investment opportunity? |
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11. |
What is last year’s residual income? |
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12. |
What is the residual income of this year’s investment opportunity? |
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13. |
If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year? |
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14. |
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? |
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15-a. |
Assume that the contribution margin ratio of the investment opportunity was 75% instead of 80%. 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? |
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15-b. |
Would the owners of the company want her to pursue the investment opportunity? |
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(1) Margin = operatin income/ net sales
= 280,000/1,400,000
= 20%
(2) turonver = sales/ Average total assets
= 1,400,000/875,000
= 1.6
(3) ROI = 1.6*20 = 32%
(4) Margin = 480,000@80% - 336,000 = $48,000
= 48,000/480,000 = 10%
(5) Turnover = 480,000/300,000 = 1.6
(6) ROI = 10*1.6 = 16%
(7) Margin = (280,000+48,000)/ (1,400,000 +480,000)
= 17.45%
(8) Turnover = 1,880,000/1,175,000 = 1.6
(9) Roi = 1.6*17.45 = 27.92%
10 A) no
b) yes
11) Last years residual invome
Net operating income 280,000
mimimun return 875,000@15% 131,250
Residual income 148,750
12) AVerage operating assets 300,000
Net operating income 48,000
Minimum rate return 300,000@15% 45,000
Residual income 3,000
13) $151,750
14) yes
15) a and b - n0
