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. what is the margin related to this year's investment opportunity? 2. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year? 3. 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?
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. what is the margin related to this year's investment opportunity? 2. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year? 3. 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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
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
1. what is the margin related to this year's investment opportunity?
2. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?
3. 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?
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