Question

A firm has revenues of $120,000, a contribution margin ratio of 30%, and fixed expenses that total $56,000. If revenues increase $20,000, then:

a. operating income will increase by $6,000.

b. operating income will be 0.

c. fixed expenses will increase $8,000.

d. the contribution margin ratio will increase by 1/8.

Answer 1

If revenues increase by $20,000, the operating income will increase by $6,000. Correct option is a.

Step-by-step explanation:

The contribution margin ratio is the percentage of each revenue dollar that remains after covering variable expenses. In this case, the contribution margin ratio is 30%. So, if revenues increase by $20,000, the contribution margin will increase by 30% of $20,000, which is $6,000.

Operating income is calculated by subtracting fixed expenses from the contribution margin, so an increase of $6,000 in contribution margin will increase the operating income by the same amount. Therefore, option a. operating income will increase by $6,000 is correct.