Question

Miller Company's contribution format income statement for the most recent month is shown below: Per Unit Total $ 248,000 155,000 Sales (31,000 units) Variable expenses Contribution margin $ 8.00 5.00 $ 3.00 93,000 Fixed expenses 45,000 Net operating income 48,000 Required: (Consider each case independently): Book 1. What Is the revised net operating income if unit sales increase by 17.? 24, 2. What is the revised net operating Income if the sellina price decreases by S1.40 per unit and the number of units sold $140 per unit. fixed expenses increase by $9

Answer 1

Solution

Miller Company

Miller Company
1	Net operating income	$63,810
2	Net operating income	$16,504

Computations:

1. Computation of revised net operating income if unit sales increase by 17%:

Contribution margin income statement showing revised net income when unit sales increase by 17%
Sales	$290,160	(36,270 x $8)
Variable cost	$181,350
Contribution margin	$108,810
Fixed cost	$45,000
Net operating income	$63,810

Computation:

Unit sales, current = 31,000

Increased unit sales = 31,000 + 17% x 31,000 = 36,270

Sales in dollars = 36,270 x $8 = $290,160

Variable cost at $5, 36,270 x $5 = $181,350

Hence, contribution margin = 290,160 – 181,350 = $108,810

Alternatively,

Degree of operating leverage = contribution margin/net operating income

= 93,000/48,000 = 1.9375

Increase in sales = 17%

% increase in net operating income = 1.9375 x 17% = 32.94%

So, revised net operating income = 48,000 + 48,000 x 32.94% = $63,811 (approximately)

2. Selling price decreases by $1.40; number of units increases by 24%;

Revised Selling price = $8 - $1.40 = $6.60

Revised sales units =31,000 + 24% of 31,000 = 38,440 units

Sales dollars = 38,440 x $6.60 = $253,704

Contribution margin income statement showing revised net operating income
Sales	$253,704
Variable cost	$192,200
Contribution margin	$61,504
Fixed cost	$45,000
Net operating income	$16,504

Hence revised net operating income when selling price decreases by $1.40 and unit sales increases by 24% is $16,504.

Note –

Variable cost = $5 x 38,440 = $192,200

Solution

Miller Company

Miller Company
1	Net operating income	$63,810
2	Net operating income	$16,504

Computations:

1. Computation of revised net operating income if unit sales increase by 17%:

Contribution margin income statement showing revised net income when unit sales increase by 17%
Sales	$290,160	(36,270 x $8)
Variable cost	$181,350
Contribution margin	$108,810
Fixed cost	$45,000
Net operating income	$63,810

Computation:

Unit sales, current = 31,000

Increased unit sales = 31,000 + 17% x 31,000 = 36,270

Sales in dollars = 36,270 x $8 = $290,160

Variable cost at $5, 36,270 x $5 = $181,350

Hence, contribution margin = 290,160 – 181,350 = $108,810

Alternatively,

Degree of operating leverage = contribution margin/net operating income

= 93,000/48,000 = 1.9375

Increase in sales = 17%

% increase in net operating income = 1.9375 x 17% = 32.94%

So, revised net operating income = 48,000 + 48,000 x 32.94% = $63,811 (approximately)

2. Selling price decreases by $1.40; number of units increases by 24%;

Revised Selling price = $8 - $1.40 = $6.60

Revised sales units =31,000 + 24% of 31,000 = 38,440 units

Sales dollars = 38,440 x $6.60 = $253,704

Contribution margin income statement showing revised net operating income
Sales	$253,704
Variable cost	$192,200
Contribution margin	$61,504
Fixed cost	$45,000
Net operating income	$16,504

Hence revised net operating income when selling price decreases by $1.40 and unit sales increases by 24% is $16,504.

Note –

Variable cost = $5 x 38,440 = $192,200