Reference no: EM131204411
Westerville Company reported the following results from last year’s operations: Sales $ 1,600,000 Variable expenses 700,000 Contribution margin 900,000 Fixed expenses 660,000 Net operating income $ 240,000 Average operating assets $ 1,000,000 This year, the company has a $325,000 investment opportunity with the following cost and revenue characteristics: Sales $ 520,000 Contribution margin ratio 70 % of sales Fixed expenses $ 312,000 The company’s minimum required rate of return is 15%.
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? Yes No
5-a. Assume that the contribution margin ratio of the investment opportunity was 65% instead of 70%. 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? Yes No
5-b. Would the owners of the company want her to pursue the investment opportunity? Yes No
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