Sales Variable expenses Contribution Margin Fixed expenses Net operating income Average operating assets 1 Margin 2 Turnover 3 ROI 4 Margin 5 Turnover 6 $1,000,000 $300,000 $700,000 $500,000 $200,000 $625,000 ROI 7,8,9 Margin Turnover ROI 10 11 Average operating assets Net operating income Minimum required return Residual income 12 Average operating assets Net operating income Minimum required return Residual income 13 Average operating assets Net operating income Minimum required return Residual income 14 The CEO would pursure the investment opportunity because it would raise her residual income by $12,000. 15 Average operating assets Net operating income Minimum required return Residual income Sales Contribution margin ratio Fixed expenses $200,000 60% of sales $90,000 Rate of return Investment opportunity 15% $120,000