Moylan Company has provided the following contribution margin income statement: If the sales volume increases 10%, which of the following statements is CORRECT?

Question

Moylan Company has provided the following contribution margin income statement:  If the sales volume increases 10%, which of the following statements is CORRECT?

Quizplus · Accepted Answer

To calculate the effect of a 10% increase in sales volume, we need to first calculate the new sales revenue.

New sales revenue = Current sales revenue + (10% x Current sales revenue) 
= 525,500 + (0.10 x 525,500) 
= 578,050

Using the contribution margin ratio from the given statement:

Contribution margin ratio = Contribution margin / Sales revenue 
= 227,500 / 525,500 
= 0.4325

We can calculate the new contribution margin:

New contribution margin = Contribution margin ratio x New sales revenue 
= 0.4325 x 578,050 
= 249,999.13

Operating income = New contribution margin - Fixed expenses

Assuming fixed expenses remain the same, we can calculate the increase in operating income:

Increase in operating income = New contribution margin - Contribution margin 
= 249,999.13 - 227,500 
= 22,499.13

Therefore, operating income will increase by $22,499.13, which is closest to answer option B: Operating income will increase $27,300.

Moylan Company Has Provided the Following Contribution Margin Income Statement