Question

Information pertaining to Piney River Division of MO Corporation for 2004:
Revenues $950,000
Variable costs 575,000
Traceable fixed costs 336,500
Average invested capital 350,000
Imputed interest rate 10%

ROI= operating income(38,500)/ total assets(350,000)= 11%

ROI= 11%

Using the information above, assume there is a 1% increase in sales volume. What would be the new ROI(return on investment)?

can someone help me with this question, please? The answer is already given but I don't know how it got that? the solution is shown below. The only part I don't understand is WHY are we multiplying 101% by $575,000= 580,750? On the question is says a 101% increase in sales volume but not variable cost?

Can someone help me with this question, please? I understand why the revenue is multiplied by 101% but not variable costs because it says a 1% increase in sales volume NOT variable costs.

book solution:

950,000 x 101%= $959,500

575,000 x101%= (580,750) <--- deduct

( 336,500) <---- deduct

operating income= 42,500

NEW ROI= 42,500/ 350,000 = 12.1%(rounded)

Answer 1

First of all we have to understand that how we calculate the Total Revenue and Total Variable cost
Total Revenue =Sales Volume*Sales price per unit
Total Variable cost =Sales Volume*Variable cost per unit
So if there is a change in the sales volume then it is obvious that it will effect both the Total Revenue and Total Variable cost
Now in the question given the sales volume is increased by 1% and Sales price per unit and Variable cost per unit are same.
That is why Revised Total Revenue =$950,000*101% =$959,500
Revised Variable cost =$575,000*101% =$580,750
I hope that this helps you to understand the logic of answer