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A Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for 20 per unit. Variable costs are 8 per unit, and fixed costs total 180,000 per year. Answer the following independent questions:
(c) Due to an increase in demand, the company estimates that sales will increase by 75,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed costs do not change?

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abhaydwive123

By $45,000 net operating income increase (or net loss decrease) assuming that fixed costs do not change.

Calculation of increase in operating income if sales increase by $75,000.

Increase in operating income = Increase in sales x Contribution margin ratio =75,000 x 60% =$45,000

Thus, net operating income would increase by $45,000 if sales increase by $75,000.

With the increase in sales revenue, the fixed costs would not change and so the additional operating profit earned by the company would be equal to additional revenue of $75,000 multiplied by the contribution margin ratio of 60% which gives a contribution margin of $45,000 and since there would be no changes in fixed costs the additional operating income would be $45,000.

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