Question

Blossom Monograms sells stadium blankets that have been monogrammed with high school and university emblems. The blankets retail for $40 throughout the country to loyal alumni of over 1,000 schools. Blossom’s variable costs are 40% of sales; fixed costs are $120,000 per month.

Blossom currently sells 100,000 blankets per year. If sales volume were to increase by 15%, by how much would operating income increase?

Answer 1

Variable cost = $40 X 40% = $16

Fixed cost per year = $120,000 X 12 = $1,440,000

Current net operating income = [(Selling price - Variable cost) X Units sold] - Fixed cost

= [($40 - $16) X 100,000] - $1,440,000

= $960,000

New selling price = $40 + 15% = $46

New variable cost = $46 X 40% = $18.40

New net operating income = [(Selling price - Variable cost) X Units sold] - Fixed cost

= [($46 - $18.40) X 100,000] - $1,440,000

= $1,320,000

Increase in net operating income = $1,320,000 - $960,000 = $360,000