A cement manufacturer has supplied the following data:
-If the company increases its unit sales volume by 3% without increasing its fixed expenses,then total net operating income should be closest to:

Question

A cement manufacturer has supplied the following data: 
-If the company increases its unit sales volume by 3% without increasing its fixed expenses,then total net operating income should be closest to:

Quizplus · Accepted Answer

To find out the total net operating income, we need to use the contribution margin (CM) ratio.
CM ratio = (Sales - Variable expenses) / Sales
Given that the fixed expenses remain constant, the net operating income will increase by the same percentage as the increase in the sales revenue.
So, we can use the following formula to calculate the new net operating income:
New net operating income = Old net operating income + (Increase in sales revenue x CM ratio)
Increase in sales revenue = 3% of the old sales revenue
CM ratio = (Sales - Variable expenses) / Sales
Now, let's use the figures from the options given:
A) Old net operating income = $81,800
    Increase in sales revenue = 3% x $620,000 = $18,600
    CM ratio = ($620,000 - $434,000) / $620,000 = 0.3
    New net operating income = $81,800 + ($18,600 x 0.3) = $87,880
B) Old net operating income = $99,940
    Increase in sales revenue = 3% x $749,500 = $22,485
    CM ratio = ($749,500 - $524,650) / $749,500 = 0.3
    New net operating income = $99,940 + ($22,485 x 0.3) = $106,110
C) Old net operating income = $2,400
    Increase in sales revenue = 3% x $80,000 = $2,400
    CM ratio = ($80,000 - $48,000) / $80,000 = 0.4
    New net operating income = $2,400 + ($2,400 x 0.4) = $3,360
D) Old net operating income = $83,316
    Increase in sales revenue = 3% x $602,000 = $18,060
    CM ratio = ($602,000 - $421,400) / $602,000 = 0.3
    New net operating income = $83,316 + ($18,060 x 0.3) = $88,938
Therefore, the option with the closest net operating income is B) $106,110.

A Cement Manufacturer Has Supplied the Following Data