Question

Omega Company has sales of $300,000 and cost of goods sold of $200,000. The cost of goods sold is a variable cost. The Company incurred $20,000 of fixed operating expenses and $40,000 of variable operating expenses. Based on this information a 10% increase in revenue will produce a:________.

A) 15.0 % change in net income.
B) 11.5 % change in net income.
C) 20.0 % change in net income.
D) 10.0 % change in net income.

Answer 1

A 10% increase in revenue will produce a A) 15.0 % change in net income

Step-by-step explanation:

Net income before increasing in revenue = sales - Cost of goods sold - Variable operating expenses - fixed operating expenses = $300,000 - $200,000 - $40,000 - $20,000 = $40,000

Revenue after increasing = $300,000 + $300,000 x 10% = $330,000

When revenue increase, variable costs will increase.

Cost of goods sold = $200,000 + $200,000 x 10% = $220,000

Variable operating expenses = $40,000 + $40,000 x 10% = $44,000

Net income after increasing in revenue = sales - Cost of goods sold - Variable operating expenses - fixed operating expenses = $330,000 - $220,000 - $44,000 - $20,000 = $46,000

Change in net income = ($46,000 - $40,000)/$40,000 = 15.0%