Question

Omega Company has sales of $310,000 and cost of goods sold of $205,000. The cost of goods sold is a variable cost. The Company incurred $21,000 of fixed operating expenses and $41,000 of variable operating expenses. Based on this information a(n) 11% increase in revenue will produce a

a.12.2 % change in net income.
b.21.5 % change in net income.
c.16.0 % change in net income.
d.10.8 % change in net income.

Answer 1

To find the percentage change in net income due to an 11% increase in revenue for Omega Company, calculate the current net income, adjust sales and variable costs by 11%, and recalculate the net income. Fixed costs do not change. The result is approximately a 16.0% increase in net income.

Step-by-step explanation:

To calculate the percentage change in net income due to an 11% increase in revenue for Omega Company, we can follow these steps: First, calculate the current net income by subtracting both variable and fixed costs from the sales. Then, increase the sales by 11%, and recalculate the net income assuming that variable costs also increase by 11% because they are associated with sales volume. Fixed costs remain unchanged.

Initial Net Income = Sales - (Variable Costs + Fixed Costs) = $310,000 - ($205,000 + $41,000) - $21,000 = $43,000. New Sales = $310,000 × 1.11 = $344,100.

New Variable Costs = $205,000 × 1.11 = $227,550 (since variable operating expenses will also increase by 11%, add $41,000 × 1.11 to this amount).

New Net Income = New Sales - (New Variable Costs + Fixed Costs) = $344,100 - ($227,550 + $45,510 + $21,000) = $50,040.

Percentage Change in Net Income = (New Net Income - Initial Net Income) / Initial Net Income × 100 = ($50,040 - $43,000) / $43,000 × 100 ≈ 16.4%.

The closest answer would thus be c. 16.0% change in net income, factoring in that the variable operating expenses increased proportionally with sales.