Question

Westerville Company reported the following results from lastyear’s 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 company’s minimum required rate of return is15%.

1.	What is last year’s margin?

2.	What is last year’s turnover? (Round your answer to 1decimal place.)

3.	What is last year’s return on investment (ROI)?

4.	What is the margin related to this year’sinvestment opportunity?

5.	What is the turnover related to this year’s investmentopportunity? (Round your answer to 1 decimalplace.)

6.	What is the ROI related to this year’s 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 Westerville’s chief executive officer will earn a bonus onlyif her ROI from this year exceeds her ROI from last year, would shepursue the investment opportunity?

	Yes
	No

10-b.

Would the owners of the company want her to pursue theinvestment opportunity?

	Yes
	No

11.	What is last year’s residual income?

12.	What is the residual income of this year’s 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 Westerville’s 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?

	Yes
	No

15-a.

Assume that the contribution margin ratio of the investmentopportunity was 40% instead of 50%. If Westerville’s 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?

	Yes
	No

15-b.

Would the owners of the company want her to pursue theinvestment opportunity?

	No
	Yes