Posters.com is a small Internet retailer of high-quality posters. The company ha

Question

Posters.com is a small Internet retailer of high-quality posters. The company has $720,000 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 $4,800,000 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: 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?

Explanation / Answer

Sales Contribution Margin @11% Fixed Cost Net Operating Income Average Operating Asset ROI % $4,300,000 $473,000 $153,000 $320,000 $720,000 44.44 $4,400,000 $484,000 $153,000 $331,000 $720,000 45.97 $4,500,000 $495,000 $153,000 $342,000 $720,000 47.5 $4,600,000 $506,000 $153,000 $353,000 $720,000 49.03 $4,700,000 $517,000 $153,000 $364,000 $720,000 50.56 $4,800,000 $528,000 $153,000 $375,000 $720,000 52.08

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