Question

last year, cayman corporation had sales of $26 million, total variable costs of $15 million, and total fixed costs of $5,000,000. in addition, they paid $4 million in interest to bondholders. cayman has a marginal tax rate of 21 percent. if cayman's sales increase by 15%, what should be the increase in operating income

Answer 1

Cayman Corporation

The increase in operating income is 27.5% (or $1.65 million).

Step-by-step explanation:

a) Data and Calculations:

Sales last year = $26 million

Total variable costs 15 million

Contribution margin $11 million

Fixed costs 5 million

Operating income $6 million

Bondholders' interest 4 million

Income before tax $2 million

Income taxes (21%) 0.42 million

Net income $1.58 million

Last Year Increase by 15%

Sales revenue = $26 million $29.9 million

Total variable costs 15 million 17.25 million

Contribution margin $11 million $12.65 million

Fixed costs 5 million 5.0 million

Operating income $6 million $7.65 million $1.65 m or 0.275

Bondholders' interest 4 million 4.0 million

Income before tax $2 million 3.65 million

Income taxes (21%) 0.42 million 0.7665 million

Net income $1.58 million 2.8835 million = 82.5%