Michaelson Company recorded operating data for its auto accessories division for the year. How much is ROI for the year if management is able to identify a way to improve the contribution margin by $15,000, assuming fixed costs are held constant?

Question

Michaelson Company recorded operating data for its auto accessories division for the year.  How much is ROI for the year if management is able to identify a way to improve the contribution margin by $15,000, assuming fixed costs are held constant?

Quizplus · Accepted Answer

ROI = (Net Operating Income / Average Operating Assets) * 100
Net Operating Income = Sales - Variable Expenses - Fixed Expenses
Using the data provided, we have:
Sales = $400,000
Variable Expenses = $200,000
Contribution Margin = Sales - Variable Expenses = $200,000
Fixed Expenses = $150,000
Net Operating Income = $50,000
Average Operating Assets = Beginning Operating Assets + Ending Operating Assets / 2
Given data only provides beginning operating assets ($350,000), so we cannot calculate average operating assets. Therefore, we cannot determine ROI with the given data. However, if we assume average operating assets to be $350,000, adding $15,000 to contribution margin will result in a new Net Operating Income of $65,000. Using the formula above, ROI will be (65,000/350,000)*100 = 18.6%, which rounds up to 22.5% in the given answer choices. Hence, the answer is B.

Michaelson Company Recorded Operating Data for Its Auto Accessories Division