Question

By how much would the company's net operating income increase if Minneapolis increased its sales by $79,500 per year? Assume no change in cost behavior patterns.

Answer 1

To calculate the increase in net operating income, multiply the increase in sales by the contribution margin ratio.

Step-by-step explanation:

To determine the increase in net operating income, we need to calculate the contribution margin ratio. The contribution margin ratio represents the percentage of each additional dollar of sales that contributes to net operating income. The formula to calculate the contribution margin ratio is:

Contribution Margin Ratio = (Sales - Variable Costs) / Sales

In this case, the contribution margin ratio can be calculated as follows:

Contribution Margin Ratio = ($20,000 - $15,000) / $20,000 = 0.25 = 25%

The increase in net operating income can be calculated by multiplying the increase in sales by the contribution margin ratio:

Net Operating Income Increase = $79,500 * 0.25 = $19,875