Question

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

Revenue	$	1,600,000
Less: Variable expenses		976,000
Contribution margin	$	624,000
Less: Fixed expenses		416,000
Net income	$	208,000

Required:

1. Show the hotel’s cost structure by indicating the percentage of the hotel’s revenue represented by each item on the income statement.

2. Suppose the hotel’s revenue declines by 30 percent. Use the contribution-margin percentage to calculate the resulting decrease in net income.

3. What is the hotel’s operating leverage factor when revenue is $1,600,000?

4. Use the operating leverage factor to calculate the increase in net income resulting from a 35 percent increase in sales revenue.

Answer 1

Answer
1) Cost structure of hotel
Particulars	Amount	% of revenue	Working
Revenue	$      1,600,000	100%
less: variable expenses	$         976,000	61%	976000/1600000*100
Contribution margin	$         624,000	39%	624000/1600000*100
less: fixed cost	$         416,000	26%	416000/1600000*100
Net income	$         208,000	13%	208000/1600000*100
2)If revenue decrease by 30% then contribution margin will be
1600000*39%*70% = 436,800
Contribution margin	$         436,800
less: fixed cost	$         416,000
net income/ loss	$           20,800
3) Operating leverage factor = contribution margin/net income
Operating leverage factor = 624000/208000
operating leverage factor = 3
4) % change in net income = %change in sale*operating leverage factor
% change in net income = 35%*3
% change in net income = 105%
increase in net income = 208000*150% =$218,400