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

Sales $ 1,300,000

Variable expenses 440,000

Contribution margin 860,000

Fixed expenses 600,000

Net operating income $ 260,000

Average operating assets $ 812,500

This year, the company has a $162,500 investment opportunity with the following cost and revenue characteristics:

Sales $ 260,000

Contribution margin ratio 80 % of sales

Fixed expenses $ 182,000

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

1. What is last year’s margin?

Margin       %

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

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

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

Margin   %

5. What is the turnover related to this year’s investment opportunity? (Round your answer to 1 decimal place.)

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

ROI %

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))

MARGIN %

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))

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?

Yes

No

10-b. Would the owners of the company want her to pursue the investment opportunity?

No

Yes

11. 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?

Yes

No

12-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?

No

Yes

12-b. Would the owners of the company want her to pursue the investment opportunity?

No

Yes