Question

Tennill Incorporated has a $1,400,000 investment opportunity with the following characteristics: Sales $ 4,480,000 Contribution margin ratio 40% of sales Fixed expenses $ 1,657,600 The return on investment (ROI) for this year's investment opportunity considered alone is closest to:

Answer 1

Answer:

9.6%

Explanation:

Tennill incorporation has an investment of $1,400,000

Sales is $4,480,000

Fixed expenses is $1,657,600

The first step is to calculate the contribution margin ratio

= 40/100×4,480,000

= 0.4×4,480,000

= 1,792,000

The variable cost can be calculated as follows

=Sales-CM

= 4,480,000-1,792,000

= 2,688,000

Net profit = Sales-Fixed cost-Variable cost

= 4,480,000-(1,657,600+2,688,000)

= 4,480,000-4,345,600

= 134,400

Therefore the ROI can be calculated as follows

= Net profit/investment × 100

= 134,400/1,400,000 × 100

=0.096×100

= 9.6%

Hence the return on investment for this year's investment opportunity considered alone is closest to 9.6%