Moylan Company has provided the following information: $$\begin{array} { | l | r | }
\hline \text { Sales } & \$ 777,000 \
\hline \text { Variable expenses } & 504,000 \
\hline \text { Fixed expenses } & 212,000 \
\hline
\end{array}$$ Which of the following statements is true, if the sales volume increases by 10%?

Question

Moylan Company has provided the following information: $$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 777,000 \
\hline \text { Variable expenses } & 504,000 \
\hline \text { Fixed expenses } & 212,000 \
\hline
\end{array}$$ Which of the following statements is true, if the sales volume increases by 10%?

Quizplus · Accepted Answer

To calculate the answer, we need to use the contribution margin (CM) ratio, which is the contribution margin divided by sales.

CM Ratio = (Sales - Variable Expenses) / Sales 
CM Ratio = ($777,000 - $504,000) / $777,000 
CM Ratio = 35.1%

Using the CM ratio, we can calculate the operating income at the current sales volume:

Operating Income = (CM Ratio x Sales) - Fixed Expenses 
Operating Income = (0.351 x $777,000) - $212,000 
Operating Income = $41,127

If sales volume increases by 10%, then the new sales volume will be $854,700:

New Sales Volume = $777,000 x 1.10 
New Sales Volume = $854,700

Using the CM ratio again, we can calculate the new operating income:

New Operating Income = (CM Ratio x New Sales Volume) - Fixed Expenses 
New Operating Income = (0.351 x $854,700) - $212,000 
New Operating Income = $68,427

To find the increase in operating income, we subtract the original operating income from the new operating income:

Increase in Operating Income = New Operating Income - Operating Income 
Increase in Operating Income = $68,427 - $41,127 
Increase in Operating Income = $27,300

Therefore, the correct answer is B.

Moylan Company Has Provided the Following Information Which of the Following Statements Is True, If the Sales