Craycraft Inc. reported the following results from last year's operations:?Sales$12,600,000 ?Variable expenses9,380,000?Contribution margin3,220,000?Fixed expenses2,716,000?Net operating income$504,000 ?Average operating assets$7,000,000 At the beginning of this year, the company has a $800,000 investment opportunity with the following characteristics:?Sales$560,000 ??Contribution margin ratio50%of sales?Fixed expenses$246,400 ?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. 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%.)5. 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.)6. 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%.)
What will be an ideal response?
1. Last year's Margin = Net operating income ÷ Sales = $504,000 ÷ $12,600,000 = 4.0%
2. Last year's Turnover = Sales ÷ Average operating assets = $12,600,000 ÷ $7,000,000 = 1.80
3. Last year's ROI = Net operating income ÷ Average operating assets = $504,000 ÷ $7,000,000 = 7.2%
or
ROI = Margin × Turnover = 4.0% × 1.80 = 7.2%
4. If the company pursues the investment opportunity and otherwise performs the same as last year, the margin will be:
| ? | Net operating income of the investment opportunity: | |
| ? | Contribution margin (50% × $560,000) | $280,000 |
| ? | Fixed expenses | 246,400 |
| ? | Net operating income | $33,600 |
Sales = $12,600,000 + $560,000 = $13,160,000
Margin = Net operating income ÷ Sales = $537,600 ÷ $13,160,000 = 4.1%
5. If the company pursues the investment opportunity and otherwise performs the same as last year, the turnover will be:
Sales = $12,600,000 + $560,000 = $13,160,000
Average operating assets = $7,000,000 + $800,000 = $7,800,000
Turnover = Sales ÷ Average operating assets = $13,160,000 ÷ $7,800,000 = 1.69
6. 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 = $537,600 ÷ $7,800,000 = 6.9%
or
ROI = Margin × Turnover = 4.1% × 1.69 = 6.9%
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