Exercise 9-10 Cost-Volume-Profit Analysis and Return on Investment (ROI) [LO9-1]

Question

Exercise 9-10 Cost-Volume-Profit Analysis and Return on Investment (ROI) [LO9-1]

Posters.com is a small Internet retailer of high-quality posters. The company has $790,000 in operating assets and fixed expenses of $165,000 per year. With this level of operating assets and fixed expenses, the company can support sales of up to $5,300,000 per year. The company’s contribution margin ratio is 11%, which means that an additional dollar of sales results in additional contribution margin, and net operating income, of 11 cents.

Complete the following table showing the relation between sales and return on investment (ROI). (Round your percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

What happens to the company’s return on investment (ROI) as sales increase?

Posters.com is a small Internet retailer of high-quality posters. The company has $790,000 in operating assets and fixed expenses of $165,000 per year. With this level of operating assets and fixed expenses, the company can support sales of up to $5,300,000 per year. The company’s contribution margin ratio is 11%, which means that an additional dollar of sales results in additional contribution margin, and net operating income, of 11 cents.

Explanation / Answer

1 Sales Net operating income Average operating assets ROI $    48,00,000 $       3,63,000 $       7,90,000 45.95% $    49,00,000 $       3,74,000 $       7,90,000 47.34% $    50,00,000 $       3,85,000 $       7,90,000 48.73% $    51,00,000 $       3,96,000 $       7,90,000 50.13% $    52,00,000 $       4,07,000 $       7,90,000 51.52% $    53,00,000 $       4,18,000 $       7,90,000 52.91% Workings: Net operating income = Sales X Contribution margin ratio - Fixed expenses = (Sales X 11%) - $1,65,000 ROI = Net operating income / Average operating assets 2 ROI increases by = 1.39% Workings: (a) Increase in Sales = 100000 (b) Contribution margin ratio = 11% (c) Increase in contribution margin and net operating income (a) X (b) = 11000 (d) Average operating assets = 790000 (e) Increase in Return on investment (c) / (d) = 1.39%

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