Westerville Company_ROI Analysis

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Description

Westerville Company reported the
following results from last years operations:

Sales $1,000,000

Variable Expenses $300,000

Contribution Margin $700,000

Fixed Expenses $500,000

Net Operating Income: $200,000

Average Operating Assets: $625,000

This year the company has a $120,000
investment opportunity with the following cost and revenue characteristics:

Sales $200,000

Contribution Margin Ration 60% of sales

Fixed Expenses $90,000

The company’s minimum required rate of
return is 15%

1. What
is last year’s margin?

2. What
is last year’s turnover? Round answer to one decimal place

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

4. What
is the margin related to this year’s investment opportunity? (%)

5. What
is the turnover related to this year’s investment opportunity? (Round to 2
decimal Places)

6. What
is the ROI related to this year’s investment opportunity? (%)

7. If
the company pursues the investment opportunity and otherwise performs the same
as last year, what margin will it earn this year? (Round to one Decimal Place)

8. If
the company pursues the investment opportunity and otherwise performs the same
as last year, what turnover will it earn this year? (Two Decimal Places)

9. If
the company pursues the investment opportunity and otherwise performs the same
as last year, what ROI will it earn this year? (One Decimal Place) (%)

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?

B. Would the owners of
the company want her to pursue the investment opportunity?

11. What is last year’s
residual income?

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

13.If
the company pursues the investment opportunity and otherwise performs the same
as last year, what residual income will it earn this year?

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?

15. 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?

B. Would the owners
of the company want her to pursue the investment opportunity?

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