Posters.com is a small Internet retailer of high-quality posters. The company ha
ID: 2572107 • Letter: P
Question
Posters.com is a small Internet retailer of high-quality posters. The company has $840,000 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 $5,200,000 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?
Complete the following table showing the relation between sales and return on investment (ROI). (Round your percentage answers to 2 decimal places.)
What happens to the company’s return on investment (ROI) as sales increase?
Explanation / Answer
net operating income can be arrived at by using the formula = (sales * contribution margin) - fixed expense
for example at sales $4,700,000
net operating income will be ($4,700,000*12%) - $165,000
=>$564,000 - 165,000
=>$399,000
ROI = net operating income / average operating assets
at sales of $4,700,000 ROI = $399,000 / $840,000
=>47.50%
Sales
2nd part.
INCREASES
as the sales increase the ROI increases from 47.50 % to 54.64%.
infact for each $100,000 increase in sale the ROI increased by 1.43% approximately.
Sales
Net operating income Average operating assets ROI (net operating income/ average operating assets) $4,700,000 $399,000 $840,000 47.50% $4,800,000 (4,800,000*12%)-$165,000 =>$411,000 $840,000 48.93% $4,900,000 (4,900,000*12%)-$165,000=>$423,000 $840,000 50.36% $5,000,000 (5,000,000*12%)-$165,000=>$435,000 $840,000 51.79% $5,100,000 (5,100,000*12%)-$165,000=>$447,000 $840,000 53.21% $5,200,000 (5,200,000*12%)-$165,000=>$459,000 $840,000 54.64%Related Questions
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