The following income statement was produced when volume of sales was at 400 units. If volume reaches 500 units, net income will be:
A) $625
B) $1,800
C) $700
D) None of the above

Question

The following income statement was produced when volume of sales was at 400 units.  If volume reaches 500 units, net income will be:
A) $625 
B) $1,800 
C) $700 
D) None of the above

Quizplus · Accepted Answer

% change = (Alternative measure − Base measure) ÷ Base measure
% change = (500 − 400) ÷ 400 = 25%
Magnitude of operating leverage = Contribution margin ÷ Net income
Magnitude of operating leverage = $800 ÷ $500 = 1.6
Increase in net income = Net income + (Net income × Percentage increase in sales × Magnitude of degree of operating leverage)
Increase in net income = $500 + ($500 × 0.25 × 1.6) = $700

The Following Income Statement Was Produced When Volume of Sales