Revenue $ 1,500,000 Less: Variable expenses 975,000 Contribution margin $ 525,000 Less: Fixed expenses 420,000 Net...


Revenue	$	1,500,000
Less: Variable expenses		975,000
Contribution margin	$	525,000
Less: Fixed expenses		420,000
Net income	$	105,000

4.Use the operating leverage factor to calculate the increase in net income resulting from a 25 percent increase in sales revenue.

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Expert Solution

Operating leverage = (Revenue – Variable expenses) / Net income

= (1,500,000 – 975,000) / 105,000

= 525,000 / 105,000

= 5

Now, given there is a 25% increase in revenue.

New revenue = 1,500,000 × (1 + 0.25)

= 1,500,000 × 1.25

= 1,875,000

Operating leverage = (Revenue – Variable expenses) / Net income

5 = (1,875,000 – 975,000) / Net income

5 = 900,000 / Net income

Net income = 900,000 / 5

= 180,000

Increase in net income = 180,000 – 105,000

= $ 75,000 (Answer)

ekkarill92 answered 1 year ago

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