Molina Company has provided the following information: $$\begin{array} { | l | r |}
\hline \text { Sales } & \$ 779,000 \
\hline \text { Variable expenses } & 508,000 \
\hline \text { Fixed expenses } & 213,000 \
\hline
\end{array}$$ Which of the following statements is true,if the sales volume increases by 10%?
A) Operating income will increase by $5,800.
B) Operating income will increase by $27,100.
C) Fixed expenses will increase by $21,300.
D) Contribution margin will increase by $77,900.

Question

Molina Company has provided the following information: $$\begin{array} { | l | r |} 
\hline \text { Sales } & \$ 779,000 \
\hline \text { Variable expenses } & 508,000 \
\hline \text { Fixed expenses } & 213,000 \
\hline
\end{array}$$ Which of the following statements is true,if the sales volume increases by 10%?
A) Operating income will increase by $5,800.
B) Operating income will increase by $27,100.
C) Fixed expenses will increase by $21,300.
D) Contribution margin will increase by $77,900.

Quizplus · Accepted Answer

Operating income increases by the increase in contribution margin minus fixed expenses. The contribution margin ratio is (Sales - Variable expenses) / Sales = (779,000 - 508,000) / 779,000 = 271,000 / 779,000 ≈ 0.348. A 10% increase in sales is 779,000 * 0.10 = 77,900. The increase in contribution margin is 77,900 * 0.348 ≈ 27,100. Fixed expenses do not change with sales volume, so the entire increase in contribution margin goes to operating income.

Molina Company Has Provided the Following Information Which of the Following Statements Is True,if the Sales Volume