Q33E - Horngren'S Financial And Managerial Accounting

Question

The Circle Clock Company sells a particular clock for \(25. The variable costs are \)13 per clock and the breakeven point is 250 clocks. The company expects to sell 300 clocks this year. If the company actually sells 400 clocks, what effect would the sale of additional 100 clocks have on operating income? Explain your answer.  

Step-by-Step Solution

Answer

The operating income increase to $1,200 with an additional sale of $100 clock, due to increased sales revenue and contribution margin.

 

Step 1: Statement showing operating income

 

Sales Volume	Contribution margin per unit ($25-$13)	Total contribution margin (Contribution margin x Quantity)	Fixed cost	Operating income
250	$12	$3,000	$3,000	$0
300	$12	$3,600	$3,000	$600
400	$12	$4,800	$3,000	$1,200

 

Step 2: Sensitivity analysis

 The increase in sales of 100 units increased operating income by $1,200 (100 units x $12 contribution margin per unit).