Introduction to Managerial Accounting: The Foundational 15 Unit 7 Chapter 9 - Westerville Company

Introduction to Managerial Accounting
The Foundational 15 Unit 7 Chapter 9

Westerville Company reported the following results form last year’s 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 ratio 60% of sales
Fixed expenses 90,000

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

Required:
1. What is last year's margin?
2. What is last year's turnover?
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 turn over related to this year's investment opportunity?
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?
8. If the company pursues the investment opportunity and otherwise performs the same as last year, what turnover will it earn this year?
9. If the company pursues the investment opportunity and otherwise performs the same as last year, what ROI will it earn this year?
10. 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? 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 perfroms 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. 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? Would the owners of the company want her to pursue the investment opportunity?
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