Question

A firm's products have an average contribution margin ratio of 40%, which will be maintained for the next month even though fixed expenses are expected to rise by $20,000. In order to keep operating income for the month from being affected, revenues will have to increase by:

a) 8000
b) 12000
c) 20000
d) 50000

Answer 1

Additional revenues of $50,000 are required to maintain the operating income level if fixed expenses rise by $20,000, given a contribution margin ratio of 40%.

Step-by-step explanation:

The question is asking how much revenues need to rise to compensate for an increase in fixed expenses, given a constant average contribution margin ratio for the firm's products. If fixed expenses rise by $20,000 and the contribution margin ratio is 40%, the additional revenue required to maintain the same level of operating income must cover the increased fixed expenses and the associated variable expenses. To find the additional revenue required, you divide the increase in fixed expenses by the contribution margin ratio: $20,000 / 0.40 = $50,000. Therefore, revenues must increase by $50,000 to keep operating income unchanged.