Question

A company has provided the following data: Picture If the dollar contribution margin per unit is increased by 10%, total fixed cost is decreased by 20%, and all other factors remain the same, net operating income will: increase by $61,000. increase by $20,000. increase by $3,500. increase by $11,000.

Answer 1

The net operating income increases by $11,000.

Step-by-step explanation:

Data provided

Sales 3,000 units

Sales Price $70 per unit

Variable Cost $50 per unit

Fixed Cost $25,000

We can calculate the contribution margin as:

Contribution margin = sales price - variable cost = (70-50) = 20

The net operating income can be defined as:

`NOI=cm*q-FC=(p-vc)*q-FC\\\\NOI=(70-50)*3,000-25,000=20*3,000-25,000=60,000-25,000\\\\NOI=35,000`

According to the changes proposed in the problem

Contribution margin = 20 * (1+0.1) = 22

Fixed cost = 25,000 * (1-0.2) = 20,000

The new net operating income is:

`NOI=cm*q-FC=(p-vc)*q-FC\\\\NOI=22*3,000-20,000=66,000-20,000=46,000`

Then

`NOI'-NOI=46,000-35,000=11,000`

With these changes, the net operating income increases by $11,000.