Cost-Volume-Profit Analysis and Return on Investment (ROI) [LO1]

Images.com is a small Internet retailer of high-quality posters. The company has $800,000 in operating assets and fixed expenses of $160,000 per year. With this level of operating assets and fixed expenses, the company can support sales of up to $5 million 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 relationship between sales and return on investment

(ROI).

Sales Net Operating Income Average Operating Assets ROI $4,500,000 $290,000 $800,000 ?
$4,600,000 ? $800,000 ?
$4,700,000 ? $800,000 ?
$4,800,000 ? $800,000 ?
$4,900,000 ? $800,000 ?
$5,000,000 ? $800,000 ?
2. What ha ppens t o t he c ompany’s r eturn on i nvestment ( ROI) a s sales i ncrease? E xplain.