Figure 8-7
The income statement for Thomas Manufacturing Company for 2011 is as follows: $\begin{array}{lr}
\text { Sales }(10,000 \text { units) } & £ 120,000 \
\text { Variable expenses } & 72,000 \
\text { Contribution margin } & £ 48,000 \
\text { Fixed expenses } &{36,000}\
\text { Operating income } & £ 12,000
\end{array}$
-Refer to Figure 8-7. If sales increase by £60,000, what will happen to profit?

Question

Quizplus · Accepted Answer

The contribution margin ratio is calculated as Contribution Margin / Sales = £48,000 / £120,000 = 0.4 or 40%. An increase in sales by £60,000 would result in an increase in contribution margin by 40% of £60,000, which is £24,000. Since fixed expenses remain constant, the entire increase in contribution margin directly increases profit.

Figure 8-7 the Income Statement for Thomas Manufacturing Company for 2011

Figure 8-7
the Income Statement for Thomas Manufacturing Company for 2011