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CHAPTER 11: CHAPTER END REVIEW Best Sleep Company reported the following results from last year's operations: $ Sales Variable expenses Contribution margin Fixed expenses Net operating income Average operating assets 1,500,000 650,000 850,000 580,000 270,000 1,000,000 $ $ At the beginning of this year, the company has a $160,000 investment opportunity with the following cost and revenue characteristics Sales Contribution margin ratio $ 240,000 70 % of sales $ 144,000 Fixed expenses The company's minimum required rate of return is 10%.

Answer 1

13) pursues If it performs Same as last year. & the investment opportunity then. Sales $240000 Variable eupenses (2000) . (100-70% of con mbulun) 9 168000 30% of sales contribution tor of Sales 1240000 X 304 Fired cupenses $144000 ! 3. Net operating $ 24000 B Income The companies net operating income is $24,000 through Sales It wmpany follows investment opportunity thep profit = $160000 x mmimum requred retum - $160000 X 10% = $ 16000 Through last year method the company gets residual Halu = $24,000. 000 x mmimum nqured rabot - + She won't pursue the investment opportunity because through investment She' earns only 101. of $ 160,000 (ie.416,000) through Sales

She cams manimum of $24.000 $24,000. 657. instead of fol. It contribution ratio = 654. inste - Sales . - $ 240000 ☺ Variable cost $ (84000) - (35% of sales) contribution $ 150000 144000 65% of Sales) $ tined expenses & Net operating $12000 B Income . Since the contribution is low the value of Met operating income decreases about $12000 2. The company owners wont pursue the opportunity in investments