[The following information applies to the questions
displayed below.]
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Westerville Company
reported the following results from last year’s operations:
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Sales
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$
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2,000,000
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Variable expenses
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640,000
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Contribution margin
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1,360,000
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Fixed expenses
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860,000
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Net operating income
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$
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500,000
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Average operating assets
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$
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1,250,000
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This year, the company
has a $250,000 investment opportunity with the following cost and revenue
characteristics:
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Sales
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$
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400,000
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Contribution margin ratio
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70
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% of sales
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Fixed expenses
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$
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220,000
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The company’s minimum required rate of return is 10%.
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3.
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Assume that Cane
expects to produce and sell 94,000 Alphas during the current year. One of
Cane’s sales representatives has found a new customer that is willing to
buy 24,000 additional Alphas for a price of $136 per unit. If Cane accepts
the customer’s offer, how much will its profits increase or decrease?
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4.
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Assume that Cane
expects to produce and sell 104,000 Betas during the current year. One of
Cane’s sales representatives has found a new customer that is willing to
buy 3,000 additional Betas for a price of $62 per unit. If Cane accepts the
customer’s offer, how much will its profits increase or decrease?
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7.
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If the company pursues
the investment opportunity and otherwise performs the same as last year, what
margin will it earn this year? (Round your
percentage answer to 1 decimal place (i.e .1234 should be entered as 12.3))
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10-a.
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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?
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10-b.
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Would the owners of the
company want her to pursue the investment opportunity?
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11.
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What is last year’s residual income?
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12.
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What is the residual
income of this year’s investment opportunity?
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13.
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If the company pursues
the investment opportunity and otherwise performs the same as last year, what
residual income will it earn this year?
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14.
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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?
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15-a.
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Assume that the contribution margin ratio
of the investment opportunity was 60% 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?
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15-b.
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Would the owners of the
company want her to pursue the investment opportunity?
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