Required informationThe Foundational 15 (Static) [LO10-1, LO10-2]Skip to question [The following information applies to the questions displayed below.] Westerville Company reported the following results from last year’s operations: Sales$ 1,000,000Variable expenses300,000Contribution margin700,000Fixed expenses500,000Net operating income$ 200,000Average operating assets$ 625,000At the beginning of this year, the company has a $120,000 investment opportunity with the following cost and revenue characteristics: Sales$ 200,000 Contribution margin ratio60% of salesFixed expenses$ 90,000 The company’s minimum required rate of return is 15%. Foundational 10-15 (Static)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? multiple choice 1YesNo 15-b. Would the owners of the company want her to pursue the investment opportunity? multiple choice 2YesNo

The money you have left over after paying your regular expenses, such as your mortgage, credit card bills, utilities, groceries, and auto loans, is known as residual income. This extra cash can be used for investments, debt repayment, savings, or even a trip fund.Answer: Last Year Investment Opportunity Total Sales $ 10,00,000.00 $ 2,00,000.00 $ 12,00,000.00 Less: Variable Cost $ 3,00,000.00 $ 1,00,000.00 $ 4,00,000.00 Contribution Margin $ 7,00,000.00 $ 1,00,000.00 $ 8,00,000.00 Less: Fixed Cost $ 5,00,000.00 $ 90,000.00 $ 5,90,000.00 Net Operating Income $ 2,00,000.00 $ 10,000.00 $ 2,10,000.00 Average operating assets $ 6,25,000.00 $ 80,000.00 $ 7,05,000.00 Variable cost (Investment Opportunity)=($200000 x 50%) Residual Income of previous year calculated in 14 above $ 1,06,250.00 Residual Income=($210000-$705000*15%) $ 1,04,250.00 Reduce Residual Income $ 2,000.00 Answer 15-a. No, Residual Income is lower than the residual income from the previous year, so Westerville's chief executive would not pursue the investment opportunity Answer 15-b. Investment Opportunity $ 1,20,000.00 Net Operating Income $ 10,000.00 Minimum required rate of return=($120000*15%) $ 18,000.00 Residual Income $ -8,000.00 No, The Chief executive officer of the company does not want to pursue the investment opportunity because net operating income is below the minimum required rate of return.

Answered: Required information The Foundational…

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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Required information

The Foundational 15 (Static) [LO10-1, LO10-2]

Skip to question

[The following information applies to the questions displayed below.]

Westerville Company reported the following results from 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

At the beginning of 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%.

Foundational 10-15 (Static)

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?

multiple choice 1

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

multiple choice 2

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