The following information is for Gable, Inc. and Harlowe, Inc. for the recent year. What total amount of net income will Harlowe, Inc. earn if it experiences a 10 percent increase in revenue?
A) $180, 000
B) $80,000
C) $260,000
D) $20,000

Question

The following information is for Gable, Inc. and Harlowe, Inc. for the recent year.  What total amount of net income will Harlowe, Inc. earn if it experiences a 10 percent increase in revenue?
A) $180, 000 
B) $80,000 
C) $260,000 
D) $20,000

Quizplus · Accepted Answer

Magnitude of operating leverage = Contribution margin ÷ Net income
Magnitude of operating leverage = $600,000 ÷ $200,000 = 3.0
Increase in net income = Net income + (Net income × Percentage increase in sales × Magnitude of degree of operating leverage)
Increase in net income = $200,000 + ($200,000 × 0.10 × 3.0) = $260,000

The Following Information Is for Gable, Inc