Final answer:
When a firm with a 30% contribution margin ratio and fixed expenses of $56,000 experiences a revenue increase of $20,000, its operating income will increase by $6,000. This is because the additional contribution margin generated from the revenue increase goes directly toward operating income, as fixed expenses do not change.
Step-by-step explanation:
The question asks about the impact of an increase in revenues on operating income for a firm with a given contribution margin ratio and fixed expenses. We're told that the firm has revenues of $120,000, a contribution margin ratio of 30%, and fixed expenses totaling $56,000. If the firm's revenues increase by $20,000, we need to calculate the additional contribution margin and then determine the effect on operating income.
Firstly, the contribution margin is calculated by multiplying the contribution margin ratio (in this case, 30%) by the revenue. With the increase in revenue of $20,000, the additional contribution margin will be $20,000 * 30% = $6,000.
Since the fixed expenses remain constant (they do not vary with sales volume), the entire $6,000 of additional contribution margin will go toward increasing the operating income. Therefore, here is what happens:
- The operating income will increase by $6,000, not leading to operating income being zero or fixed expenses increasing.
- The contribution margin ratio will remain the same since it's a ratio and doesn't change with increases in dollar sales unless variable cost rates change, which is not indicated in this scenario.
So, the correct answer to the original question is that (a) operating income will increase by $6,000.