Question

Posters.com is a small Internet retailer of high-quality posters. The company has $790,000 in operating assets and fixed expenses of $156,000 per year. With this level of operating assets and fixed expenses, the company can support sales of up to $4,600,000 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.

Required:

Complete the following table showing the relation between sales and return on investment (ROI). (Round your percentage answers to 2 decimal places.)

	Sales Net Operating Average Operating ROI Income Assets % $4,100,000 $295,000 $790,000 % $4,200,000 $790,000 % $4,300,000 $790,000 % $4,400,000 $790,000 % $4,500,000 $790,000 % $4,600,000 $790,000 %

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

	Increases Decreases

Answer 1

Sales $4,100,000 $4,200,000 $4,300,000 $4,400,000 $4,500,000 $4,600,000 Net Operating Average Operating ROI Income Assets $295,000 $790,000 37.34% $306,000 $790,000 38.73% $317,000 $790,000 40.13% $328,000 $790,000 41.52% $339,000 $790,000 42.91% $350,000 $790,000 44.30% Working note : Net operating income = Sales * Contribution margin ratio - Fixed costs For 41,00,000 sales : net income = 41,00,000*11% - 156000 = $295000 Same for remaining ROI = Net operating income / Avg Operating assets What happens to the company's return on investment (ROI) as sales increase? Increases As Sales Increases, Net operating income increase that leads to Increase in ROI (Can be seen from above computation)