Question

Exercise 7-32 Continuation of Preceding Exercise (LO 7-4, 7-7)

A contribution income statement for the Nantucket Inn is shown below. (Ignore income taxes.)

Revenue	$	1,700,000
Less: Variable expenses		980,000
Contribution margin	$	720,000
Less: Fixed expenses		510,000
Net income	$	210,000

Required:
1. Prepare a contribution income statement if the hotel’s volume of activity increases by 25 percent, and fixed expenses increase by 50 percent.
2. Prepare a contribution income statement if the ratio of variable expenses to revenue doubles. There is no change in the hotel’s volume of activity. Fixed expenses decline by $140,000.

Answer 1

1-
		Current state		Changed State
Revenue		1700000	1700000*1.25	2125000
less variable expenses	variable cost ratio = total variable cost/total sales =(980000/1700000) =57.65%	980000	2125000*57.65%	1225063
contribution margin		720000		899937.5
less fixed expenses		510000	510000*1.5	765000
Net income		210000		134938
2-
		Current state		Changed State
Revenue		1700000		1700000
less variable expenses	variable cost ratio = total variable cost/total sales =(980000/1700000) =57.65%	980000	980000*(1+100%)	1960000
contribution margin		720000		-260000
less fixed expenses		510000	(510000-140000)	370000
Net income		210000		-630000