Question

Heather Hudson makes stuffed teddy bears. Recent information for her business follows:

Selling price per bear	$	27.00
Total fixed cost per month		1,480.00
Variable cost per bear		8.00

She sells 440 bears this month.

Suppose sales increase by 20 percent next month. Calculate the effect that increase will have on her profit. (Round your intermediate calculations to 2 decimal places. Round your final answer to 1 decimal place. (i.e. .123 should be entered as 12.3%))

Answer 1

Ans.	*Income statement at current level:
	HEATHER HUDSON
	CVP Income Statement
		Total	Per unit
	Sales (440 *p)	$11,880	$27.00
	Variable expenses (440 * v)	-$3,520	-$8.00
	Contribution margin	$8,360	$19.00
	Fixed expenses	-$1,480
	Net operating income	$6,880
	P   =   price per unit
	V = variable cost per unit
	*To calculate the effect of percentage increase in sales on net income, we need
	to calculate the degree of operating leverage first.
	Degree of operating leverage    =   Contribution margin / Operating income
		$8,360 / $6,880
		1.22
	Percentage change (increase) in net income = Operating leverage * Increase in revenue
		1.22 * 20%
		24.4%