Westerville Company reported the following results from last year’s operations:Sales$ 1,500,000Variable expenses690,000Contribution margin810,000Fixed expenses435,000Net operating income$ 375,000Average operating assets$ 1,250,000At the beginning of this year, the company has a $350,000 investment opportunity with the following cost and revenue characteristics:Sales$ 420,000 Contribution margin ratio70% of salesFixed expenses$ 252,000 The company’s minimum required rate of return is 10%.1. Assume that the contribution margin ratio of the investment opportunity was 65% instead of 70%. 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 or no2. Would the owners of the company want her to pursue the investment opportunity?

Solution:- 1)Calculations if the contribution margin ratio of the investment opportunity was 65%…

Answered: 1. Assume that the contribution margin…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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

Sales	$ 1,500,000
Variable expenses	690,000
Contribution margin	810,000
Fixed expenses	435,000
Net operating income	$ 375,000
Average operating assets	$ 1,250,000

At the beginning of this year, the company has a $350,000 investment opportunity with the following cost and revenue characteristics:

Sales	$ 420,000
Contribution margin ratio	70	% of sales
Fixed expenses	$ 252,000

The company’s minimum required rate of return is 10%.

1. Assume that the contribution margin ratio of the investment opportunity was 65% instead of 70%. 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 or no

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

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