Posters.com is a small Internet retailer of high-quality posters. The company ha
ID: 2519466 • Letter: P
Question
Posters.com is a small Internet retailer of high-quality posters. The company has $720,000 in operating assets and fixed expenses of $163,000 per year. With this level of operating assets and fixed expenses, the company can support sales of up to $5,000,000 per year. The company’s contribution margin ratio is 12%, which means that an additional dollar of sales results in additional contribution margin, and net operating income, of 12 cents.
Required:
1. Complete the following table showing the relation between sales and return on investment (ROI).
2. What happens to the company’s return on investment (ROI) as sales increase?
answers to 2 decimal places.)
What happens to the company’s return on investment (ROI) as sales increase?
Explanation / Answer
Sales
Contribution Margin (B = A x 12%
Fixed Cost ( C)
Net Operating Income [D=B - C]
Assets (E )
ROI [D/E]
$45,00,000.00
$ 5,40,000.00
$ 1,63,000.00
$ 3,77,000.00
$ 7,20,000.00
52.36%
$46,00,000.00
$ 5,52,000.00
$ 1,63,000.00
$ 3,89,000.00
$ 7,20,000.00
54.03%
$47,00,000.00
$ 5,64,000.00
$ 1,63,000.00
$ 4,01,000.00
$ 7,20,000.00
55.69%
$48,00,000.00
$ 5,76,000.00
$ 1,63,000.00
$ 4,13,000.00
$ 7,20,000.00
57.36%
$49,00,000.00
$ 5,88,000.00
$ 1,63,000.00
$ 4,25,000.00
$ 7,20,000.00
59.03%
$50,00,000.00
$ 6,00,000.00
$ 1,63,000.00
$ 4,37,000.00
$ 7,20,000.00
60.69%
As the sale increases, the ROI also increases, because, more sales leads to more operating income when other factors remain the same.
Sales
Contribution Margin (B = A x 12%
Fixed Cost ( C)
Net Operating Income [D=B - C]
Assets (E )
ROI [D/E]
$45,00,000.00
$ 5,40,000.00
$ 1,63,000.00
$ 3,77,000.00
$ 7,20,000.00
52.36%
$46,00,000.00
$ 5,52,000.00
$ 1,63,000.00
$ 3,89,000.00
$ 7,20,000.00
54.03%
$47,00,000.00
$ 5,64,000.00
$ 1,63,000.00
$ 4,01,000.00
$ 7,20,000.00
55.69%
$48,00,000.00
$ 5,76,000.00
$ 1,63,000.00
$ 4,13,000.00
$ 7,20,000.00
57.36%
$49,00,000.00
$ 5,88,000.00
$ 1,63,000.00
$ 4,25,000.00
$ 7,20,000.00
59.03%
$50,00,000.00
$ 6,00,000.00
$ 1,63,000.00
$ 4,37,000.00
$ 7,20,000.00
60.69%
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