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27 July, 14:15

Rihanna, Inc. sells watches for $100 per watch. The variable expenses are $20 per unit, and the fixed expenses total $80,000 per period. By how much will net operating income change if watch sales are expected to increase by $400,000

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  1. 27 July, 18:13
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    Net operating income = $240,000

    Explanation:

    At first we have to determine the break-even sales.

    We know,

    Break-even sales in units = Fixed expense : (Sales price per unit - Variable cost per unit)

    Break-even sales in units = $80,000 : ($100 - 80)

    Break-even sales in units = $80,000 : $20 = 4,000 units.

    Therefore, if the company sells 4,000, there will be no operating income.

    If the total sales of Rihanna, Inc. is increased by $400,000, it means the company sells $400,000 : $100 = 4,000 more units.

    Therefore,

    Sales = $400,000

    Less: Variable expense (4,000*$40) = $160,000

    Contribution Margin = $240,000

    The new net operating income will be $240,000 as the fixed expense remains same for the entire period.
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