Question

Murphy company produces flash drives for computers, which it sells for $20 each. each flash drive costs $8 of variable costs to make. during april, 700 drives were sold. fixed costs for april were $4 per unit for a total of $2,800 for the month. how much does murphy's operating income increase for each $1,000 increase in revenue per month?

Answer 1

We can find the increase in operating income for each $ 1,000 increase in revenue per month by finding the contribution margin ratio and the multiplying it with the increase operating income of $ 1,000 each.

The formula to find the contribution margin ratio is :-

Contribution margin ratio = Contribution margin per unit / Selling price per unit

= 12 / 20 = 60%

The increase in operating income = Contribution margin ratio * Revenue

= 60 % * 1,000

= $ 600

The calculations are shown below :-

Selling price per unit = $ 20

Variable cost per unit = $ 8

Contribution margin per unit = Selling price per unit - Variable cost per unit

= $ 20 - $ 8 = $ 12