Reference no: EM13337471

Waterville Company reported the following results from last year's operations:

Sales $100,000,00

Variable Expenses 300,000

Contribution margin 700,000

Fixed expenses 500,000

Net operating Income $200,000

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

The company's required rate of return is 15%.

Required to Answer:

1. What is last year's margin?

2. What is last year's turnover?

3. What is last year's return on investment (ROI)?

4. What is the margin related to this year's investment opportunity?

5. What is the turn over related to this year's investment opportunity?

6. What is the ROI related to this year's investment opportunity?

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

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

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

11. What is last year's residual income?

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

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

14. 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?

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