Posters.com is a small Internet retailer of highquality posters. The company ha
ID: 2476178 • Letter: P
Question
Posters.com is a small Internet retailer of highquality posters. The company has $710,000 in operating assets and fixed expenses of $153,000 per year. With this level of operating assets and fixed expenses, the company can support sales of up to $5,100,000 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 (i.e., 0.1234 should be entered as 12.34).)
Sales
Net Operating
Average Operating
ROI
Income
Assets
%
$ 4,600,000
$ 353,000
$ 710,000
%
$ 4,700,000
$ 710,000
%
$ 4,800,000
$ 710,000
%
$ 4,900,000
$ 710,000
%
$ 5,000,000
$ 710,000
%
$ 5,100,000
$ 710,000
%
What happens to the company’s return on investment (ROI) as sales increase?
Increases
Decreases
Sales
Net Operating
Average Operating
ROI
Income
Assets
%
$ 4,600,000
$ 353,000
$ 710,000
%
$ 4,700,000
$ 710,000
%
$ 4,800,000
$ 710,000
%
$ 4,900,000
$ 710,000
%
$ 5,000,000
$ 710,000
%
$ 5,100,000
$ 710,000
%
Explanation / Answer
Calculation of Net Operating Income when Sales are:
4,700,000 =$353,000+ ($4,700,000-$4,600,000)*11/100 =$364,000
4,800,000=$364,000+ ($4,800,000-$4,700,000)*11/100 =$375,000
4,900,000=$375,000+ ($4,900,000-$4,800,000)*11/100 =$386,000
5,000,000=$386,000+ ($5,000,000-$4,900,000)*11/100 =$397,000
5,100,000=$397,000+ ($5,100,000-$5,000,000)*11/100 =$408,000
ROI= Ner Operating Income/ Average Operating Assets
When Sales increases the ROI of a Company will Increase (Assuming remainig are Constant)
Sales ($) Neet Operating Income ($) Average Operating Assets ($) ROI % 4,600,000 353,000 710,000 49.72% 4,700,000 364,000 710,000 51.27% 4,800,000 375,000 710,000 52.82% 4,900,000 386,000 710,000 54.37% 5,000,000 397,000 710,000 55.92% 5,100,000 408,000 710,000 57.46%Related Questions
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