The income statement for Thomas Manufacturing Company is as follows: $\begin{array}{lr}
\text { Sales }(10,000 \text { units }) & \$ 120,000 \
\text { Variable expenses } & 72,000 \
\text { Contribution margin } & \$ 48,000 \
\text { Fixed expenses } & \$ 36,000 \
\text { Operating income } & \$ 12,000
\end{array}$
- 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.

The Income Statement for Thomas Manufacturing Company Is as Follows