The following income statements are provided for two companies operating in the same industry: Assuming sales increase by $1,000, select the correct statement from the following:
A) Felix's net income will be more than Jinx's.
B) Only Felix will experience an increase in profit.
C) Felix's net income will increase by $250.
D) Jinx's net income will increase by 6%.

Question

The following income statements are provided for two companies operating in the same industry:  Assuming sales increase by $1,000, select the correct statement from the following:
A) Felix's net income will be more than Jinx's. 
B) Only Felix will experience an increase in profit. 
C) Felix's net income will increase by $250. 
D) Jinx's net income will increase by 6%.

Quizplus · Accepted Answer

Magnitude of operating leverage = Contribution margin ÷ Net income
Felix: Magnitude of operating leverage = $175,000 ÷ $105,000 = 1.6667
Jinx: Magnitude of operating leverage = $130,000 ÷ $105,000 = 1.2381
Impact of an increase in sales of $1,000 or 0.5% (= $1,000 ÷ $105,000):
Increase in net income = Sales × Percentage increase × Magnitude of degree of operating leverage
Felix: Increase in net income = $105,000 × (0.5% × 1.6667) = $875
Jinx: Increase in net income = $105,000 × (0.5% × 1.2381) = $650

The Following Income Statements Are Provided for Two Companies Operating