Question

Rihanna, Inc. sells watches for $100 per watch. The variable expenses are $20 per unit, and the fixed expenses total $80,000 per period. By how much will net operating income change if watch sales are expected to increase by $400,000

Answer 1

Answer:

Net operating income = $240,000

Explanation:

At first we have to determine the break-even sales.

We know,

Break-even sales in units = Fixed expense ÷ (Sales price per unit - Variable cost per unit)

Break-even sales in units = $80,000 ÷ ($100 - 80)

Break-even sales in units = $80,000 ÷ $20 = 4,000 units.

Therefore, if the company sells 4,000, there will be no operating income.

If the total sales of Rihanna, Inc. is increased by $400,000, it means the company sells $400,000 ÷ $100 = 4,000 more units.

Therefore,

Sales                                                     = $400,000

Less: Variable expense (4,000*$40)  = $160,000

Contribution Margin                             = $240,000

The new net operating income will be $240,000 as the fixed expense remains same for the entire period.