[The following information applies to the questions displayed below.) Westerville Company reported the following results from last year's operations: Sales Variable expenses Contribution margin Fixed expenses Net operating income Average operating assets $ 1,200,000 420,000 780,000 600,000 $ 180,000 $ 600,000 At the beginning of this year, the company has a $137,500 investment opportunity with the following cost and revenue characteristics: Sales Contribution margin ratio Fixed expenses $ 220,000 60% of sales $ 99,000 The company's minimum required rate of return is 20%. f 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., 0.1234 should be entered as 12.3).)

Question

09-12-2022
Business

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[The following information applies to the questions displayed below.) Westerville Company reported the following results from last year's operations: Sales Variable expenses Contribution margin Fixed expenses Net operating income Average operating assets $ 1,200,000 420,000 780,000 600,000 $ 180,000 $ 600,000 At the beginning of this year, the company has a $137,500 investment opportunity with the following cost and revenue characteristics: Sales Contribution margin ratio Fixed expenses $ 220,000 60% of sales $ 99,000 The company's minimum required rate of return is 20%. f 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., 0.1234 should be entered as 12.3).)

Answer :

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smecloudbird18 smecloudbird18 · Answer 1 · 2022-12-17T22:58:43-05:00

The company's margin this year would be 18.9%.

To calculate the margin, we need to calculate the operating income from the proposed investment opportunity. The sales for the proposed investment opportunity is $220,000 and the contribution margin ratio is 60%, so the contribution margin is $132,000. The fixed expenses are $99,000, so the operating income is $33,000.

The total operating income for the year would be $213,000, which is the sum of the operating income from the proposed investment opportunity ($33,000) and the net operating income from last year ($180,000).

The total operating assets for the year would be $820,000, which is the sum of the operating assets from the proposed investment opportunity ($220,000) and the average operating assets from last year ($600,000).

The margin for the year would be 18.9%, which is calculated by dividing the operating income ($213,000) by the total operating assets ($820,000).

The margin is also higher than the company's minimum required rate of return (20%) so the company should pursue the investment opportunity.

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