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The Foundational 15

Westerville Company reported the following results from last year%u2019s operations:

Sales $ 1,000,000

Variable expenses 300,000

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Contribution margin 700,000

Fixed expenses 500,000

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Net operating income $ 200,000

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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

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The company%u2019s minimum required rate of return is 15%.

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 opporunity? Would the owners of the copmany want her to pursue the investment opportunity?

11. What is the residual income?

12. What is the residual income of this year's investment opportunity?

13. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual inocme will it earn this year?

14. If Westerville's CEO 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 the Westerville's CEO 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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