Question

Rihanna, Inc. sells watches for $100 per watch. The variable expenses are $40 per unit, and the fixed expenses total $35,000 per period. By how much will net operating income change if watch sales are expected to increase by $10,000

Answer 1

$6,000

Step-by-step explanation:

The computation of net income is shown below:-

Contribution ratio = Contribution margin ÷ Sales

= ($100 - $40) ÷ $100

= $60 ÷ $100

= 60%

Increase in contribution margin = Increased sales × Contribution ratio

= $10,000 × 60%

= $6,000

Since fixed costs do not change and net income will increase by $6,000

Therefore for computing the net income we simply applied the above formula.