Wolley Inc. reported the following results from last year's operations:?Sales$7,200,000 ?Variable expenses5,210,000?Contribution margin1,990,000?Fixed expenses1,486,000?Net operating income$504,000 ?Average operating assets$4,000,000 At the beginning of this year, the company has a $1,200,000 investment opportunity with the following characteristics:?Sales$1,560,000 ???Contribution margin ratio30%of sales?Fixed expenses$343,200 ?The company's minimum required rate of return is 14%.Required:1. What was last year's margin? (Round to the nearest 0.1%.)2. What was last year's turnover? (Round to the nearest 0.01.)3. What was last year's return on investment (ROI)? (Round to the nearest 0.1%.)4. What is the margin related to this year's investment opportunity?
(Round to the nearest 0.1%.)5. What is the turnover related to this year's investment opportunity? (Round to the nearest 0.01.)6. What is the ROI related to this year's investment opportunity? (Round to the nearest 0.1%.)7. If the company pursues the investment opportunity and otherwise performs the same as last year, what will be the overall margin this year? (Round to the nearest 0.1%.)8. If the company pursues the investment opportunity and otherwise performs the same as last year, what will be the overall turnover this year? (Round to the nearest 0.01.)9. 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%.)10. 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 Margin = Net operating income ÷ Sales = $504,000 ÷ $7,200,000 = 7.0%
2. Last year's Turnover = Sales ÷ Average operating assets = $7,200,000 ÷ $4,000,000 = 1.80
3. Last year's ROI = Net operating income ÷ Average operating assets = $504,000 ÷ $4,000,000 = 12.6%
or
ROI = Margin × Turnover = 7.0% × 1.80 = 12.6%
4. The margin for this year's investment opportunity is:
| ? | Contribution margin (30% × $1,560,000) | $468,000 |
| ? | Fixed expenses | 343,200 |
| ? | Net operating income | $124,800 |
5. The turnover for this year's investment opportunity is:
Turnover = Sales ÷ Average operating assets = $1,560,000 ÷ $1,200,000 = 1.30
6. The ROI for this year's investment opportunity is:
ROI = Net operating income ÷ Average operating assets = $124,800 ÷ $1,200,000 = 10.4%
or
ROI = Margin × Turnover = 8.0% × 1.30 = 10.4%
7. If the company pursues the investment opportunity and otherwise performs the same as last year, the margin will be:
Net operating income = $504,000 + $124,800 = $628,800
Sales = $7,200,000 + $1,560,000 = $8,760,000
Margin = Net operating income ÷ Sales = $628,800 ÷ $8,760,000 = 7.2%
8. If the company pursues the investment opportunity and otherwise performs the same as last year, the turnover will be:
Sales = $7,200,000 + $1,560,000 = $8,760,000
Average operating assets = $4,000,000 + $1,200,000 = $5,200,000
Turnover = Sales ÷ Average operating assets = $8,760,000 ÷ $5,200,000 = 1.68
9. If the company pursues the investment opportunity and otherwise performs the same as last year, the ROI will be:
ROI = Net operating income ÷ Average operating assets = $628,800 ÷ $5,200,000 = 12.1%
or
ROI = Margin × Turnover = 7.2% × 1.68 = 12.1%
10. The CEO would not pursue the investment opportunity because it decreases the overall ROI. The owners of the company would not want the CEO to pursue the investment opportunity because its ROI is less than the company's minimum required rate of return.
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