Copyright

Westerville Company reported the following results from last year's operations: Sales $ 1,600,000...

Question:

Westerville Company reported the following results from last year's operations :

Sales $1,600,000
Variable expenses $700,000
Contribution margin $900,000
Fixed expenses $660,000
Net operating income $ 240,000
Average operating assets $1,000,000

This year, the company has a $325,000 investment opportunity with the following cost and revenue characteristics:

Sales $520,000
Contribution margin ratio 70 % of sales
Fixed expenses $312,000

The company's minimum required rate of return is 15%.

a. 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))

b. 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.)

c. 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))

Return on Investment:

Return on investment can be calculated using the operating income and the average operating assets. However, it can also be broken down into the margin (operating income as a percentage of sales) times asset turnover.

Answer and Explanation:


a) The operating income = $240,000 + (($520,000 x 0.70 = $364,000) - $220,000 = $144,000)

= $384,000

Margin = operating income / sales revenue

=...

See full answer below.

Become a Study.com member to unlock this answer! Create your account

View this answer

Learn more about this topic:

Loading...
Return on Investment: Definition, Formula & Example

from Intro to Business: Help and Review

Chapter 25 / Lesson 6
636K

Related to this Question

Explore our homework questions and answers library