The following income statements are provided for two companies operating in the same industry: $\begin{array}{c}
\begin{array}{l}
\
\text {Revenue}\
\text {Variable costs}\
\text { Contribution margin }\
\text {Fixed costs}\
\text {Net income}\
\end{array}
\begin{array}{lll}
\text { Felix Company }\
\$200,000\
(25,000)\
175,000\
(70,000)\
\$105,000
\end{array}
\begin{array}{c}
\text {Jinx Company}\
\$ 200,000 \
(70,000) \
130,000 \
(25,000) \
\$ 10 5,000
\end{array}

\end{array}$
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: $\begin{array}{c}
\begin{array}{l}
\
\text {Revenue}\
 \text {Variable costs}\
\text { Contribution margin }\
\text {Fixed costs}\
 \text {Net income}\
\end{array}  
\begin{array}{lll}
\text { Felix Company  }\
\$200,000\
(25,000)\
175,000\
(70,000)\
\$105,000 
\end{array}
\begin{array}{c}
\text {Jinx Company}\
\$  200,000 \
 (70,000) \
130,000 \
 (25,000) \
 \$ 10 5,000
\end{array}

\end{array}$
 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

CFelix Company has a higher contribution margin ratio due to lower variable costs, meaning an increase in sales will result in a higher increase in net income compared to Jinx Company. For Felix, the variable cost is 12.5% of sales ($25,000/$200,000), so a $1,000 increase in sales would increase net income by $875 ($1,000 - 12.5% of $1,000). For Jinx, the variable cost is 35% of sales ($70,000/$200,000), so a $1,000 increase in sales would increase net income by $650 ($1,000 - 35% of $1,000). Therefore, Felix's net income will increase more than Jinx's, making statements A and C correct.

The Following Income Statements Are Provided for Two Companies Operating