Question

A contribution income statement for the Nantucket Inn is shown below. (Ignore income taxes.)

Revenue	$	1,200,000
Less: Variable expenses		624,000
Contribution margin	$	576,000
Less: Fixed expenses		432,000
Net income	$	144,000

Required:

1. Show the hotel’s cost structure by indicating the percentage of the hotel’s revenue represented by each item on the income statement.

2. Suppose the hotel’s revenue declines by 30 percent. Use the contribution-margin percentage to calculate the resulting decrease in net income.

3. What is the hotel’s operating leverage factor when revenue is $1,200,000?

4. Use the operating leverage factor to calculate the increase in net income resulting from a 35 percent increase in sales revenue.

Answer 1

Requirement 1 representing each item of Contribution Margin Income Statement as percentage

All constituents of following income statement are calculated by taking revenue equal to 100%

so Further calculations are as following =

Variable Expenses %=Variable expenses*100/Revenue = 624000*100/1200000= 52% Contribution %=Contribution*100/Revenue = 576000*100/1200000= 48% Fixed Expense %=Fixed Expense*100/Revenue = 432000*100/1200000= 36% Net Income %=Net Income*100/Revenue = 144000*100/1200000= 12%

So Now Contribution Margin Income Statement will be as follow with %

Nantucket Inn
Contribution Margin Income Statement
	Amount	Percent
Revenue	$       1,200,000	100	%
Variable Expense	$           624,000	52	%
Contribution	$           576,000	48	%
Fixed Costs	$           432,000	36	%
Net Income	$           144,000	12	%

Requirement 2 When the hotel revenue decrease by 30% the net decrease in net income by percentage contribution margin method

Here Net Decrease in Net Operating will be $172800 calculated as following

Contribution margin % = 48% as calculated above

Decrease in revenue = 30% of 1200000 = $360000

Decrease in Net operation income will be = Contribution % x decrease in revenue

= 48% of $360000

= $172800

Requirement 3. Calculation of operating leverage when revenue is $1200000

Operating Leverage = CONTRIBUTION/Earning after Fixed Expenses

= $576000/$144000

= 4

Requirement 4. use of operating leverage factor to calculate increase in income when there is 35% increase in revenue

Here Net increase in Net Operating will be $201600 calculated as following

Operating leverage = 4

Increase in revenue = 35%

% Increase in Income will be = Operating leverage x % Increase in revenue

= 4 x 35%

= 140%

So increase in Net Income will be now = 140% of present income

= 140% of $144000

= $201600

New Income will be = $144000+$201600 = $345600

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