Familia Inc. reported the following results from last year's operations:?Sales$16,100,000 ?Variable expenses10,400,000?Contribution margin5,700,000?Fixed expenses4,734,000?Net operating income$966,000 ?Average operating assets$7,000,000 At the beginning of this year, the company has a $1,200,000 investment opportunity with the following characteristics:?Sales$3,840,000 ???Contribution margin ratio50%of sales?Fixed expenses$1,728,000 ??The company's minimum required rate of return is 13%.Required:1. What was last year's return on investment (ROI)? (Round to the nearest 0.1%.)2. What is the ROI related to this year's investment opportunity? (Round to the nearest 0.1%.)3. If the company pursues the investment opportunity and otherwise performs the same as last
year, what will be the overall ROI will this year? (Round to the nearest 0.1%.)4. If Westerville's chief executive officer earns a bonus only if the ROI for this year exceeds the ROI for last year, would the CEO pursue the investment opportunity? Would the owners of the company want the CEO to pursue the investment opportunity?
What will be an ideal response?
1. Last year's ROI = Net operating income ÷ Average operating assets = $966,000 ÷ $7,000,000 = 13.8%
2. The ROI for this year's investment opportunity is:
| ? | Contribution margin (50% × $3,840,000) | $1,920,000 |
| ? | Fixed expenses | 1,728,000 |
| ? | Net operating income | $192,000 |
3. If the company pursues the investment opportunity and otherwise performs the same as last year, the ROI will be:
Net operating income = $966,000 + $192,000 = $1,158,000
Average operating assets = $7,000,000 + $1,200,000 = $8,200,000
ROI = Net operating income ÷ Average operating assets = $1,158,000 ÷ $8,200,000 = 14.1%
4. The CEO would pursue the investment opportunity because it increases the overall ROI. The owners of the company would want the CEO to pursue the investment opportunity because its ROI is greater than the company's minimum required rate of return.
You might also like to view...
Much of the most critical communication between a company and its customers is about
A) production issues. B) quality issues. C) unique problems that may arise. D) routine matters. E) personnel issues.
Which of the following is TRUE of a corporation?
A) A corporation cannot be privately held. B) The earnings of a corporation may be subject to double taxation. C) A corporation has a limited life. D) The stockholders of a corporation have unlimited liability for the corporation's debt.
A ________ is a series of steps that include collection, analysis, and presentation of information for use in making marketing decisions
A) primary data collection B) secondary and primary data collection C) marketing decision support system D) pure research process E) marketing information system
At the strategic level, marketing (little m) serves as the driver of business strategy.
Answer the following statement true (T) or false (F)