Tropic Corp.has sales revenue of $500,000 resulting in operating income of $54,000.Average invested assets total $600,000,and the cost of capital is 6%.Calculate the return on investment if sales increase by 10% and the profit margin and invested assets remain the same.
A)9.0%
B)9.9%
C)10.8%
D)6.0%

Question

Quizplus · Accepted Answer

First, calculate the return on investment given the current information: 
Return on investment = Operating income / Average invested assets 
Return on investment = $54,000 / $600,000 
Return on investment = 9%

Next, calculate the new operating income with a 10% increase in sales: 
New sales revenue = $500,000 x 1.1 = $550,000 
New operating income = $550,000 x 0.108 = $59,400

Finally, calculate the return on investment with the new operating income and the same invested assets: 
Return on investment = New operating income / Average invested assets 
Return on investment = $59,400 / $600,000 
Return on investment = 9.9%

Therefore, the answer is B, 9.9%.