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Westerville Company reported the following results from last year's operations: Sales $ 2,000,000 Variable expenses 640,000 Contribution margin 1,360,000 Fixed expenses 860,000 Net operating income $ 500,000 Average operating assets $ 1,250,000 This year, the company has a $250,000 investment opportunity with the following cost and revenue characteristics: Sales $ 400,000 Contribution margin ratio 70 % of sales Fixed expenses $ 220,000 The company's minimum required rate of return is 10%
Westerville Company reported the following results from last year's operations:
| Sales | $ | 2,000,000 |
| Variable expenses | 640,000 | |
| Contribution margin | 1,360,000 | |
| Fixed expenses | 860,000 | |
| Net operating income | $ | 500,000 |
| Average operating assets | $ | 1,250,000 |
|
This year, the company has a $250,000 investment opportunity with the following cost and revenue characteristics: |
| Sales | $ | 400,000 | |
| Contribution margin ratio | 70 | % of sales | |
| Fixed expenses | $ | 220,000 | |
|
The company's minimum required rate of return is 10%. 1. What is the turnover related to this year's investment opportunity? (Round your answer to 1 decimal place.)
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Expert Solution
Answer:
| Last Year | New Investment | ||
| Sales | 2,000,000 | 400,000 | 2,400,000 |
| Variable expense | 640,000 | ||
| Contribution margin | 1,360,000 | 280,000 | 1,640,000 |
| Fixed Expense | 860,000 | 220,000 | 1,080,000 |
| Net Operatin Asset | 500,000 | 60,000 | 560,000 |
| Average Operating Asset | 1,250,000 | 250,000 | 1,500,000 |
| Minimum required rate of return | 10% | ||
| 40,000 | 240,000 | ||
| Margin for last year | $ 560,000.00 | ||
| ROI: | (560000/1500000)*100 | 37% | |
| Margin related to new investment | $ 60,000.00 | ||
| Turnover related to new investment | $ 400,000.00 | ||
| ROI related to new investment | (60000/250000)*100 | 24% | |
| Residual Income | (560000-240000) | $ 320,000.00 | |
| Residual Income related to new investment | $ 20,000.00 |
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