Reference no: EM131285133
Westerville Company reported the following results from last year’s operations:
Sales $1,500,000
Variable expenses 650,000
Contribution margin 850,000
Fixed expenses 580,000
Net operating income 270,000
Average operating assets 1,000,000
This year, the company has a $160,000 investment opportunity with the following cost and revenue characteristics:
Sales 240,000
Contribution margin ratio 70% of sales
Fixed expenses 144,000
The company’s minimum required rate of return is 10%
1. What is last year’s residual income?
2. What is the residual income of this year’s investment opportunity?
3. If the company pursues the investment opportunity and otherwise performs the same as last year, what residual income will it earn this year?
4. 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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