EXERCISE 12-10 (20 MINUTES)

2. The ROI increases by 2.5% for each $100,000 increase in sales. This

happens because each $100,000 increase in sales brings in an additional

profit of $25,000. When this additional profit is divided by the average

operating assets of $1,000,000, the result is an increase in the com-

pany’s ROI of 2.5%.

Increase in sales ... $100,000 (a)

Contribution margin ratio... 25% (b)

Increase in contribution margin and net operating

income (a) × (b) ... $25,000 (c)

Average operating assets... $1,000,000 (d)

Increase in return on investment (c) ÷ (d)... 2.5%