Westerville Company reported the following results from last year’s operations: Sales $ 1,000,000 Variable expenses 300,000 Contribution margin 700,000 Fixed expenses 500,000 Net operating income $ 200,000 Average operating assets $ 625,000

Westerville Company reported the following results from last year’s operations: Sales $ 1,000,000 Variable expenses 300,000 Contribution margin 700,000 Fixed expenses 500,000 Net operating income $ 200,000 Average operating assets $ 625,000

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter2: Financial Statements, Cash Flow, And Taxes

Section: Chapter Questions

Problem 14SP

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Required information

The Foundational 15 (Static) [LO10-1, LO10-2]

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Westerville Company reported the following results from last year’s operations:

Sales	$ 1,000,000
Variable expenses	300,000
Contribution margin	700,000
Fixed expenses	500,000
Net operating income	$ 200,000
Average operating assets	$ 625,000

At the beginning of this year, the company has a $120,000 investment opportunity with the following cost and revenue characteristics:

Sales	$ 200,000
Contribution margin ratio	60	% of sales
Fixed expenses	$ 90,000

The company’s minimum required rate of return is 15%.

Foundational 10-11 (Static)

11. What is last year’s residual income?

Definition Definition Percentage gain or loss from a specific investment over time. The rate of return is the difference between the closing and initial values of an investment divided by the initial value of the investment. The closing value includes any intermediate cash flows such as dividends or interest amounts.

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