Question

Below is the contribution margin income statement for a company's first year of operation. Next year,...

Below is the contribution margin income statement for a company's first year of operation. Next year, they anticipate sales volume to increase by 6%. What will be the net change in operating income?

Revenue $900,000
Variable Cost 615,000
Contribution Margin 285,000
Fixed Cost 190,000
Operating Income 95,000

157% increase

6% increase

No change

18% increase
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Answer #1

If sales volume increase by 6% then operating income will increase by 18%. Hence last option is correct i.e 18% increase.

EXPLANATION:

Operating leverage= Contribution/operating income

=285000/95000

=3 times

Operating leverage shows relationship between revenue and operating income. Operating leverage of 3 times means if revenue increases by 1% then operating income would change by (3 times* 1%)=3%.

So if the revenue increases by 6% then operating income will increase by (3 times* 6%)=18%.

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