Question

A cement manufacturer has supplied the following data:

Tons of cement produced and sold	680,000
Sales revenue	$ 2,788,000
Variable manufacturing expense	$ 1,156,000
Fixed manufacturing expense	$ 760,000
Variable selling and administrative expense	$ 272,000
Fixed selling and administrative expense	$ 294,000
Net operating income	$ 306,000

If the company increases its unit sales volume by 4% without increasing its fixed expenses, then total net operating income should be closest to

Answer 1

Total Variable costs = Variable manufacturing expense + Variable selling and administrative expense

= 1,156,000 + 272,000

= $1,428,000

Contribution margin = Sales – Total Variable cost

= 2,788,000 - 1,428,000

= $1,360,000

Degree of operating leverage = Contribution margin/Net operating income

= 1,360,000/306,000

= 4.4444444444

Percentage Increase in operating income = Percentage Increase in sales x Degree of operating leverage

= 4 x 4.4444444444

= 17.777777778%

Total net operating income after 4% increase in sales = Old Net operating income + Increase in operating income

= 306,000 + 306,000 x 17.777777778%

= 306,000 + 54,400

= $360,400

If the company increases its unit sales volume by 4% without increasing its fixed expenses, then total net operating income should be closest to $360,400.

Please ask if you have any query related to the question. Thank you