Question

Exercise 6-1 The Effect of Changes in Activity on Net Operating Income (LO6-1] Whirly Corporation's contribution format income statement for the most recent month is shown below: Sales (8,689 units) Variable expenses Contribution margin Fixed expenses Net operating income Total $ 301,000 172,000 129,000 55,600 $ 73,400 Per Unit $35.89 20.se $ 15.00 Required: (Consider each case independently): 1. What would be the revised net operating income per month if the sales volume increases by 90 units? 2. What would be the revised net operating income per month 3. What would be the revised net operating income per month if the sales volume is 7,600 units? 90 units? 1. Revised net operating income 2. Revised net operating income 3. Revised net operating income

Answer 1

Statement Showing Net Operating Income at Various Sales Level
	Sales Volume in Unit
	Per Unit	8,600 Units	(8,600+90) 8,690 Units	(8,600-90) 8,510 Units	7600 Units
Sales	$35.00	$301,000.00	$304,150.00	$297,850.00	$266,000.00
Variable Expenses	$20.00	$172,000.00	$173,800.00	$170,200.00	$152,000.00
Contribution Margin (Sales - Variable Expense)	$15.00	$129,000.00	$130,350.00	$127,650.00	$114,000.00
Fixed Expenses		$55,600.00	$55,600.00	$55,600.00	$55,600.00
Net Operating Income (Contribution Margin - Fixed Expenses)		$73,400.00	$74,750.00	$72,050.00	$58,400.00

This can also be calculated by another method,

1. Profit Volume(PV) Ratio = (Contribution Margin / Sales) *100

= ($15.00 / $35.00) *100 =42.86%

2. Contribution Margin = Sales * PV Ratio

Now, Operating Profit = Contribution Margin - Fixed Expenses

Requirement 1. Sales volume increased by 90 units

Units sold = 8,600 units + 90 units = 8,690 units

Sales = 8,690 units * $35.00 = $304,150.00

Contribution Margin = $304,150.00 * 42.86% = $130,358.69

So, Operating Profit = $130,358.69 - $55,600.00 = $74,758.69

Requirement 2. Sales volume decreased by 90 units

Units sold = 8,600 units - 90 units = 8,510 units

Sales = 8,510 units * $35.00 = $297,850.00

Contribution Margin = $297,850.00 * 42.86% = $127,658.51

So, Operating Profit = $127,658.51 - $55,600.00 = $72,058.51

Requirement 3. Sales volume 7,600 units

Units sold = 7,600 units

Sales = 7,600 units * $35.00 = $266,000.00

Contribution Margin = $266,000.00 * 42.86% = $114,007.60

So, Operating Profit = $114,007.60 - $55,600.00 = $58,407.60

Note: As PV Ratio is taken to two decimal places there is a little difference between the actual figures and the figures calculated by PV Ratio.