Question

Posters.com is a small Internet retailer of high-quality posters. The company has $810,000 in operating assets and fixed expenses of $157,000 per year. With this level of operating assets and fixed expenses, the company can support sales of up to $4,800,000 per year. The company’s contribution margin ratio is 10%, which means that an additional dollar of sales results in additional contribution margin, and net operating income, of 10 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? Sales Net Operating Average Operating ROI Income Assets % $4,300,000 $273,000 $810,000 % $4,400,000 $810,000 % $4,500,000 $810,000 % $4,600,000 $810,000 % $4,700,000 $810,000 % $4,800,000 $810,000 %

Answer 1

Answer

• All working forms part of the answer
• Requirement 1

Sales	Net Operating Income	Average Operating Assets	ROI
[A]	[B]	[C]	[D = (B/C) x 100]
	[See working below for calculation]
$         4,300,000	$             273,000	$          810,000	33.70%
$         4,400,000	$             283,000	$          810,000	34.94%
$         4,500,000	$             293,000	$          810,000	36.17%
$         4,600,000	$             303,000	$          810,000	37.41%
$         4,700,000	$             313,000	$          810,000	38.64%
$         4,800,000	$             323,000	$          810,000	39.88%

--Working

Sales	Increase in Sale over last	Increase in Net Operating Income at 10%	Net Operating Income for the sales level [used above]
[A]	[B]	[C = B x 10%]	[D = D + C]
$        4,300,000	$                        -	$                      -	$            273,000
$         4,400,000	$             100,000	$             10,000	$            283,000
$         4,500,000	$             100,000	$             10,000	$            293,000
$         4,600,000	$             100,000	$             10,000	$            303,000
$         4,700,000	$             100,000	$             10,000	$            313,000
$        4,800,000	$             100,000	$             10,000	$            323,000

• Requirement 2

--When sales increases, ROI also Increases.

--Increase in ROI = 1.23% per $100,000 increase in Sales