Cost-Volume-Profit Relationships

CHAPTER 5

Managerial Accounting
Seventeenth edition
 5-2

Cost-Volume-Profit Analysis: Key

Assumptions
To simplify CVP calculations, managers typically adopt the
following assumptions with respect to these factors:
1. Selling price is constant. The price of a product or
service will not change as volume changes.
2. Costs are linear and can be accurately divided into
variable and fixed components. The variable costs are
constant per unit and the fixed costs are constant in
total over the entire relevant range.
3. In multiproduct companies, the mix of products sold
remains constant.

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 5-3

Learning Objective 1

Explain how changes in sales

volume affect contribution
margin and net operating
income.

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 5-4

Basics of Cost-Volume-Profit Analysis –

Part 1
The contribution income statement is helpful to managers in judging
the impact on profits of changes in selling price, cost, or volume. The
emphasis is on cost behavior.
Racing Bicycle Company
Contribution Income Statement
For the Month of June
Sales (500 bicycles) $ 250,000
Less: Variable expenses 150,000
Contribution margin 100,000
Less: Fixed expenses 80,000
Net operating income $ 20,000

Contribution Margin (CM) is the amount remaining from sales revenue

after variable expenses have been deducted.
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 5-5

Basics of Cost-Volume-Profit Analysis –

Part 2
CM is used first to cover fixed expenses.
Any remaining CM contributes to net operating income.

Racing Bicycle Company

Contribution Income Statement
For the Month of June
Sales (500 bicycles) $ 250,000
Less: Variable expenses 150,000
Contribution margin 100,000
Less: Fixed expenses 80,000
Net operating income $ 20,000

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 5-6

The Contribution Approach – Part 1

Sales, variable expenses, and contribution margin can also be expressed
on a per unit basis. If Racing sells an additional bicycle, $200 additional
CM will be generated to cover fixed expenses and profit.

Racing Bicycle Company

Contribution Income Statement
For the Month of June
Total Per Unit
Sales (500 bicycles) $ 250,000 $ 500
Less: Variable expenses 150,000 300
Contribution margin 100,000 $ 200
Less: Fixed expenses 80,000
Net operating income $ 20,000

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 5-7

The Contribution Approach – Part 2

Each month, RBC must generate at least $80,000 in total contribution margin to
break-even (which is the level of sales at which profit is zero).

Racing Bicycle Company

Contribution Income Statement
For the Month of June
Total Per Unit
Sales (500 bicycles) $ 250,000 $ 500
Less: Variable expenses 150,000 300
Contribution margin 100,000 $ 200
Less: Fixed expenses 80,000
Net operating income $ 20,000

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 5-8

The Contribution Approach – Part 3

If RBC sells 400 units in a month, it will be
operating at the break-even point.
Racing Bicycle Company
Contribution Income Statement
For the Month of June
Total Per Unit
Sales (400 bicycles) $ 200,000 $ 500
Less: Variable expenses 120,000 300
Contribution margin 80,000 $ 200
Less: Fixed expenses 80,000
Net operating income $ -

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 5-9

The Contribution Approach – Part 4

If RBC sells one more bike (401 bikes), net
operating income will increase by $200.
Racing Bicycle Company
Contribution Income Statement
For the Month of June
Total Per Unit
Sales (401 bicycles) $ 200,500 $ 500
Less: Variable expenses 120,300 300
Contribution margin 80,200 $ 200
Less: Fixed expenses 80,000
Net operating income $ 200

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 5-10

The Contribution Approach – Part 5

We do not need to prepare an income statement to
estimate profits at a particular sales volume. Simply
multiply the number of units sold above break-even
by the contribution margin per unit.

If RBC sells 430 bikes, its net

operating income will be
$6,000
(30 units × $200 per unit).

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 5-11

CVP Relationships in Equation Form

The contribution format income statement can be
expressed in the following equation:

Profit = (Sales – Variable expenses) – Fixed expenses

Racing Bicycle Company
Contribution Income Statement
For the Month of June
Total Per Unit
Sales (401 bicycles) $ 200,500 $ 500
Less: Variable expenses 120,300 300
Contribution margin 80,200 $ 200
Less: Fixed expenses 80,000
Net operating income $ 200

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 5-12

CVP Relationships in Equation Form – Example

This equation can be used to show the profit RBC earns if it
sells 401. Notice, the answer of $200 mirrors our earlier
solution.

Profit = (Sales – Variable expenses) – Fixed expenses

$80,000
401 units × $500
401 units ×
$300
Profit = ($200,500 – $120,300) – $80,000
$200 = ($200,500 – $120,300) – $80,000
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 5-13

CVP Relationships in Equation Form – Detail

Breakdown
When a company has only one product we can further
refine this equation as shown on this slide.

Profit = (Sales – Variable expenses) – Fixed expenses

Quantity sold (Q)

× Variable expenses per unit (V)
= Variable expenses (Q × V)

Profit = (P × Q – V × Q) – Fixed expenses

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 5-14

CVP Relationships in Equation Form – Example

Showing Detail
This equation can also be used to show the $200
profit RBC earns if it sells 401 bikes.

Profit = (Sales – Variable expenses) – Fixed expenses

Profit = (P × Q – V × Q) – Fixed expenses

$200 = ($500 × 401 – $300 × 401) – $80,000

Profit

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 5-15

CVP Relationships in Equation Form – Using

Unit Contribution Margin

It is often useful to express the simple profit equation in

terms of the unit contribution margin (Unit CM) as follows:

Unit CM = Selling price per unit – Variable expenses per unit

Unit CM = P – V

Profit = (P × Q – V × Q) – Fixed expenses

Profit = (P – V) × Q – Fixed expenses
Profit = Unit CM × Q – Fixed expenses

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 5-16

CVP Relationships in Equation Form – Example

Using Unit CM

Profit = (P × Q – V × Q) – Fixed expenses

Profit = (P – V) × Q – Fixed expenses
Profit = Unit CM × Q – Fixed expenses

Profit = ($500 – $300) × 401 – $80,000

Profit = $200 × 401 – $80,000
This equation
Profit = $80,200 – $80,000 can also be
Profit = $200 used to compute
RBC’s $200 profit
if it sells 401
bikes.

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 5-17

Learning Objective 2

Prepare and interpret a cost-

volume-profit (CVP) graph
and a profit graph.

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 5-18

CVP Relationships in Graphic Form

The relationships among revenue, cost, profit, and volume
can be expressed graphically by preparing a CVP graph.
Racing Bicycle developed contribution margin income
statements at 0, 200, 400, and 600 units sold. We will use
this information to prepare the CVP graph.

Units Sold
0 200 400 600
Sales $ - $ 100,000 $ 200,000 $ 300,000
Total variable expenses - 60,000 120,000 180,000
Contribution margin - 40,000 80,000 120,000
Fixed expenses 80,000 80,000 80,000 80,000
Net operating income (loss) $ (80,000) $ (40,000) $ - $ 40,000

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 5-19

Preparing the CVP Graph – Step 1

$350,000

$300,000

$250,000

$200,000

$150,000

$100,000
In a CVP graph, unit volume is usually
$50,000
represented on the horizontal (X) axis and
dollars on the vertical (Y) axis.
$0
0 100 200 300 400 500 600

Units
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 5-20

Preparing the CVP Graph – Step 2

$350,000
Draw a line parallel to the volume axis to
represent total fixed expenses.
$300,000

$250,000

$200,000

Fixed expenses
$150,000

$100,000

$50,000

$0
0 100 200 300 400 500 600

Units
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 5-21

Preparing the CVP Graph – Step 3

Choose$350,000
some sales volume, say 400 units, and plot the point representing
total expenses (fixed and variable). Draw a line through the data point back
to where the fixed expenses line intersects the dollar axis.
$300,000

$250,000

$200,000

Total expenses
Fixed expenses
$150,000

$100,000

$50,000

$0
0 100 200 300 400 500 600

Units
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 5-22

Preparing the CVP Graph – Step 4

Choose $350,000
some sales volume, say 400 units, and plot the point representing
total sales. Draw a line through the data point back to the point of origin.
$300,000

$250,000

$200,000
Sales
Total expenses
$150,000 Fixed expenses

$100,000

$50,000

$0
0 100 200 300 400 500 600

Units
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 5-23

Preparing the CVP Graph – Break-Even Point

$350,000
Break-even point
$300,000
(400 units or $200,000 in sales) Profit Area

$250,000

$200,000
Sales
Total expenses
$150,000 Fixed expenses

$100,000

$50,000

$0
0 100 200 300 400 500 600
Loss Area Units
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 5-24

Preparing the Profit Graph – Simple Form

Profit = Unit CM × Q – Fixed Costs

$ 60,000

$ 40,000

$ 20,000
Profit

$0

-$20,000
An even simpler form of
-$40,000 the CVP graph is called
-$60,000
the profit graph.
0 100 200 300 400 500 600
Number of bicycles sold

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 5-25

Preparing the Profit Graph – Showing Break-

Even Point

$ 60,000 Break-even point, where

profit is zero, is 400
$ 40,000
units sold.
$ 20,000
Profit

$0

-$20,000

-$40,000

-$60,000

0 100 200 300 400 500 600

Number of bicycles sold

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 5-26

Learning Objective 3

Use the contribution margin

ratio (CM ratio) to compute
changes in contribution
margin and net operating
income resulting from
changes in sales volume.

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 5-27

Contribution Margin Ratio (CM Ratio)

and the Variable Expense Ratio – Step 1
The contribution margin as a percentage of sales is referred to as the
contribution margin ratio (CM ratio). This ratio is computed as follows:

For RBC, the contribution margin ratio is calculated as follows:

$80,000
CM Ratio = $200,000 = 40%

For each $1.00 increase in sales results in a total

contribution margin increase of 40¢.

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 5-28

Contribution Margin Ratio (CM Ratio) and the

Variable Expense Ratio – Step 2

The CM ratio can also be calculated by dividing the

contribution margin per unit by the selling price per unit.

Contribution Margin Per Unit

CM Ratio =
Selling Price Per Unit

CM Ratio = $200 = 40%

$500

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 5-29

Contribution Margin Ratio (CM Ratio)

and the Variable Expense Ratio – Step 3
The variable expenses as a percentage of sales is referred to as
the variable expense ratio. This ratio is computed as follows:

For RBC, the variable expense ratio is calculated as follows:

$120,000
Variable Expense Ratio = $200,000 = 60%

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 5-30

Contribution Margin Ratio (CM Ratio) and the

Variable Expense Ratio – Step 4
Having defined the two terms, it bears emphasizing that the
contribution margin ratio and the variable expense ratio can be
mathematically related to one another:

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 5-31

Applications of Contribution Ratio

If RBC increases sales from 400 to 500 bikes ($50,000),
contribution margin will increase by $20,000 ($50,000 × 40%).
Here is the proof:
400 Units 500 Units
Sales $ 200,000 $ 250,000
Less: variable expenses 120,000 150,000
Contribution margin 80,000 100,000
Less: fixed expenses 80,000 80,000
Net operating income $ - $ 20,000

A $50,000 increase in sales revenue results in a $20,000 increase in

CM ($50,000 × 40% = $20,000).

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 5-32

Quick Check 1
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is $1.49
and the average variable expense per cup is $0.36. The
average fixed expense per month is $1,300. An average of
2,100 cups are sold each month. What is the CM Ratio for
Coffee Klatch?
a. 1.319
b. 0.758
c. 0.242
d. 4.139

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 5-33

Quick Check 1a
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is
$1.49 and the average variable expense per cup is $0.36.
The average fixed expense per month is $1,300. An
average of 2,100 cups are sold each month. What is the
CM Ratio for Coffee Klatch? Unit contribution margin
CM Ratio =
a. 1.319 Unit selling price
b. 0.758 ($1.49 - $0.36)
=
c. 0.242 $1.49
d. 4.139 $1.13
= = 0.758
$1.49
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 5-34

Applications of Contribution Ratio – Increase

in Sales Volume
The relationship between profit and the CM ratio can be
expressed using the following equation:

Profit = (CM ratio × Sales) – Fixed expenses

If RBC increased its sales volume to 500 bikes, what would
management expect profit or net operating income to be?

Profit = (40% × $250,000) – $80,000

Profit = $100,000 – $80,000
Profit = $20,000

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 5-35

Learning Objective 5

Determine the break-even

point.

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 5-36

Break-Even Analysis
The equation and formula methods can be used to determine the
unit sales and dollar sales needed to achieve a target profit of zero.
Let’s use the RBC information to complete the break-even analysis.
Racing Bicycle Company
Contribution Income Statement
For the Month of June
Total Per Unit CM Ratio
Sales (500 bicycles) $ 250,000 $ 500 100%
Less: Variable expenses 150,000 300 60%
Contribution margin 100,000 $ 200 40%
Less: Fixed expenses 80,000
Net operating income $ 20,000

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 5-37

Break-Even Analysis: Equation Method

Part 1
The equation method relies on the basic profit equation
introduced earlier in the chapter. Because Racing Bicycle has
only one product, we’ll use the contribution margin form of
this equation to perform the break-even calculations. We
calculate break-even by solving the equation below:

Profit = Unit CM × Q – Fixed expenses

$0 = $200 × Q – Fixed expenses

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 5-38

Break-Even Analysis: Equation Method

Part 2

In a single product situation, the equation method

for computing the unit sales at break-even is:
Profit = Unit CM × Q – Fixed expenses
$0 = $200 × Q – Fixed expenses
$200 × Q = $0 + $80,000
Q = $80,000 ÷ $200
Q = 400 units

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 5-39

Break-Even Analysis: Formula Method

The formula method is a shortcut version of the equation
method. It centers on the idea discussed earlier in the
chapter that each unit sold provides a certain amount of
contribution margin that goes toward covering fixed
expenses.

Unit sales to break even = Fixed expenses

Unit CM
$80,000
=
$200
= 400 Units

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 5-40

Break-Even Analysis: Dollar Sales

Suppose RBC wants to compute the sales dollars
required to break-even (earn a target profit of $0).
Let’s use the equation method and the formula
methods to solve this problem.

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 5-41

Break-Even Analysis: Dollar Sales Using

Equation Method
The equation method is shown on this slide:

Profit = CM ratio × Sales – Fixed expenses

$ 0 = 40% × Sales – $80,000
40% × Sales = $80,000
Sales = $80,000 ÷ 40%

Sales = $200,000

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 5-42

Break-Even Analysis: Dollar Sales Using

CM Ratio
Now, let’s use the formula method to calculate the
dollar sales at the break-even point.

Dollar sales to Fixed expenses

=
break even CM ratio

$80,000
Dollar sales =
40%
Dollar sales = $200,000

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 5-43

Quick Check 2
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is
$1.49 and the average variable expense per cup is
$0.36. The average fixed expense per month is $1,300.
An average of 2,100 cups are sold each month. What is
the break-even sales dollars?
a. $1,300
b. $1,715
c. $1,788
d. $3,129

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 5-44

Quick Check 2a
Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup of
coffee is $1.49 and the average variable expense per
cup is $0.36. The average fixed expense per month is
$1,300. An average of 2,100 cups are sold each
month. What is the break-even sales dollars?
a. $1,300 Break-even Fixed expenses
=
b. $1,715 sales CM Ratio
c. $1,788 = $1,300
d. $3,129 0.758
= $1,715

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 5-45

Quick Check 3
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is $1.49
and the average variable expense per cup is $0.36. The
average fixed expense per month is $1,300. An average of
2,100 cups are sold each month. What is the break-even
sales in units?
a. 872 cups
b. 3,611 cups
c. 1,200 cups
d. 1,150 cups

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 5-46

Quick Check 3a
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is
$1.49 and the average variable expense per cup is
$0.36. The average fixed expense perFixed
month is $1,300.
expenses
An average of 2,100 cupsBreak-even
are sold eachCMmonth. What is
per Unit
the break-even sales in units? $1,300
a. 872 cups =
$1.49/cup - $0.36/cup
b. 3,611 cups $1,300
c. 1,200 cups =
$1.13/cup
d. 1,150 cups
= 1,150 cups

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 5-47

Learning Objective 6

Determine the level of sales

needed to achieve a desired
target profit.

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 5-48

Target Profit Analysis

In target profit analysis, we estimate what sales
volume is needed to achieve a specific target profit.
We can compute the number of units that must be
sold to attain a target profit using either:
◦ (1) Equation method, or
◦ (2) Formula method.

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 5-49

Target Profit Analysis – Formula Method

The formula method uses the following equation.

Unit sales to attain Target profit + Fixed expenses

=
the target profit CM per unit

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 5-50

Target Profit Analysis – Formula Method

Solution
Suppose RBC wants to know how many
bikes must be sold to earn a profit of
$100,000.

Unit sales to attain Target profit + Fixed expenses

=
the target profit CM per unit

$100,000 + $80,000
Unit sales =
$200
Unit sales = 900 units

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 5-51

Target Profit Analysis – Formula Method Sales

Dollars

We can also compute the target profit in

terms of sales dollars using either the
equation method or the formula method.

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 5-52

Target Profit Analysis – Formula Method

Sales Dollars Solution

Dollar sales to attain Target profit + Fixed expenses

=
the target profit CM ratio

$100,000 + $80,000
Dollar sales =
40%
Dollar sales = $450,000

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 5-53

Quick Check 4
Coffee Klatch is an espresso stand in a downtown office building.
The average selling price of a cup of coffee is $1.49 and the average
variable expense per cup is $0.36. The average fixed expense per
month is $1,300. Use the formula method to determine how many
cups of coffee would have to be sold to attain target profits of
$2,500 per month.
a. 3,363 cups
b. 2,212 cups
c. 1,150 cups
d. 4,200 cups

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 5-54

Quick Check 4a
Coffee Klatch is an espresso stand in a downtown office building.
The average selling price of a cup of coffee is $1.49 and the average
variable expense per cup is $0.36. The average fixed expense per
month is $1,300. Use
Unit the formula method to determine how many
sales
Target
cups of coffee would have to be sold profit target
to attain + Fixed expenses
profits of
$2,500 per month.to attain = Unit CM
target profit
a. 3,363 cups
b. 2,212 cups $2,500 + $1,300
= $1.49 - $0.36
c. 1,150 cups
d. 4,200 cups $3,800
=
$1.13
= 3,363 cups
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 5-55

Quick Check 5
Coffee Klatch is an espresso stand in a downtown office building.
The average selling price of a cup of coffee is $1.49 and the average
variable expense per cup is $0.36. The average fixed expense per
month is $1,300. Use the formula method to determine the sales
dollars that must be generated to attain target profits of $2,500 per
month.
a. $2,550
b. $5,013
c. $8,458
d. $10,555

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 5-56

Quick Check 5a
Coffee Klatch is an espresso stand in a downtown office building.
The average selling price of a cup of coffee is $1.49 and the average
variable expense per cup is $0.36. The average fixed expense per
month is $1,300. Use the formula method to determine the sales
Sales
dollars that must be $
generated Targettarget
to attain profitprofits
+ Fixed expenses
of $2,500 per
month. to attain = CM ratio
a. $2,550 target profit
b. $5,013 $2,500 + $1,300
= ($1.49 – 0.36) ÷ $1.49
c. $8,458
d. $10,555 $3,800
=
0.758
= $5,013
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 5-57

Learning Objective 7

Compute the margin of safety

and explain its significance.

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 5-58

The Margin of Safety in Dollars

The margin of safety is the excess of budgeted or actual
sales dollars over the break-even volume of sales dollars. It
is the amount by which sales can drop before losses are
incurred. The higher the margin of safety, the lower the
risk of not breaking even and incurring a loss.

Margin of safety in dollars = Total sales - Break-even sales

Let’s look at RBC and determine the margin of safety.

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 5-59

The Margin of Safety in Dollars – Example

If we assume that RBC has actual sales of $250,000, given
that we have already determined the break-even sales to
be $200,000, the margin of safety is $50,000 as shown.

Break-even
sales Actual sales
400 units 500 units
Sales $ 200,000 $ 250,000
Less: variable expenses 120,000 150,000
Contribution margin 80,000 100,000
Less: fixed expenses 80,000 80,000
Net operating income $ - $ 20,000

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 5-60

The Margin of Safety Percentage

RBC’s margin of safety can be expressed as 20% of sales.
($50,000 ÷ $250,000)

Break-even
sales Actual sales
400 units 500 units
Sales $ 200,000 $ 250,000
Less: variable expenses 120,000 150,000
Contribution margin 80,000 100,000
Less: fixed expenses 80,000 80,000
Net operating income $ - $ 20,000

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 5-61

The Margin of Safety in Units

The margin of safety can be expressed in terms of
the number of units sold. The margin of safety at
RBC is $50,000, and each bike sells for $500;
hence, RBC’s margin of safety is 100 bikes.

Margin of $50,000
= = 100 bikes
Safety in units $500

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 5-62

Quick Check 6
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is $1.49 and
the average variable expense per cup is $0.36. The average fixed
expense per month is $1,300. An average of 2,100 cups are sold
each month. What is the margin of safety expressed in cups?
a. 3,250 cups
b. 950 cups
c. 1,150 cups
d. 2,100 cups

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 5-63

Quick Check 6a
Coffee Klatch is an espresso stand in a downtown office
building. The average selling price of a cup of coffee is $1.49 and
the average variable expense per cup is $0.36. The average fixed
expense per month is $1,300. An average of 2,100 cups are sold
each month. What is the margin of safety expressed in cups?
a. 3,250 cups
b. 950 cups
c. 1,150 cups
d. 2,100 cups
Margin of safety = Total sales – Break-even sales
= 2,100 cups – 1,150 cups
= 950 cups

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 5-64

Learning Objective 8

Compute the degree of

operating leverage at a
particular level of sales and
explain how it can be used to
predict changes in net
operating income.

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 5-65

Operating Leverage
Operating leverage is a measure of how sensitive net
operating income is to percentage changes in sales. It
is a measure, at any given level of sales, of how a
percentage change in sales volume will affect profits.

Degree of Contribution margin

operating leverage = Net operating income

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 5-66

Operating Leverage – Example

To illustrate, let’s revisit the contribution income
statement for RBC.
Actual sales
500 Bikes
Sales $ 250,000
Less: variable expenses 150,000
Contribution margin 100,000
Less: fixed expenses 80,000
Net income $ 20,000

Degree of
$100,000
Operating = = 5
$20,000
Leverage
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 5-67

Operating Leverage – Changes in Profit

With an operating leverage of 5, if RBC
increases its sales by 10%, net operating
income would increase by 50%.

Percent increase in sales 10%

Degree of operating leverage × 5
Percent increase in profits 50%

Here’s the verification!

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 5-68

Operating Leverage – Proof of Changes

Actual sales Increased
(500) sales (550)
Sales $ 250,000 $ 275,000
Less variable expenses 150,000 165,000
Contribution margin 100,000 110,000
Less fixed expenses 80,000 80,000
Net operating income $ 20,000 $ 30,000
10% increase in sales from
$250,000 to $275,000 . . .

. . . results in a 50% increase in

income from $20,000 to $30,000.
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 5-69

Quick Check 7
Coffee Klatch is an espresso stand in a downtown
office building. The average selling price of a cup of
coffee is $1.49 and the average variable expense per
cup is $0.36. The average fixed expense per month is
$1,300. An average of 2,100 cups are sold each month.
What is the operating leverage?
a. 2.21
b. 0.45
c. 0.34
d. 2.92

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 5-70

Quick Check 7a
Actual sales
Coffee Klatch is an espresso stand in a downtown 2,100 cups
office building. The average selling price of a cup$ of 3,129
Sales
coffee is $1.49 and the average variableexpenses
Less: Variable expense per 756
cup is $0.36. The averageContribution
fixed expense per month is2,373
margin
$1,300. An average of 2,100Less:cups
Fixedare sold each month.
expenses 1,300
What is the operating leverage?
Net operating income $ 1,073
a. 2.21
b. 0.45 Operating Contribution margin
c. 0.34 leverage = Net operating income
d. 2.92 $2,373
= $1,073 = 2.21

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 5-71

Quick Check 8
At Coffee Klatch the average selling price of a cup of
coffee is $1.49, the average variable expense per cup
is $0.36, the average fixed expense per month is
$1,300, and an average of 2,100 cups are sold each
month.
If sales increase by 20%, by how much should net
operating income increase?
a. 30.0%
b. 20.0%
c. 22.1%
d. 44.2%

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 5-72

Quick Check 8a
At Coffee Klatch the average selling price of a cup of
coffee is $1.49, the average variable expense per cup
is $0.36, the average fixed expense per month is
$1,300, and an average of 2,100 cups are sold each
month.
If sales increase by 20%, by how much should net
operating income increase?
a. 30.0%
b. 20.0% Percent increase in sales 20.0%
c. 22.1% × Degree of operating leverage 2.21
Percent increase in profit 44.20%
d. 44.2%

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 5-73

Verify Increase in Profit

Actual Increased
sales sales
2,100 cups 2,520 cups
Sales $ 3,129 $ 3,755
Less: Variable expenses 756 907
Contribution margin 2,373 2,848
Less: Fixed expenses 1,300 1,300
Net operating income $ 1,073 $ 1,548
% change in sales 20.0%
% change in net operating income 44.2%
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 5-74

End of Chapter 5

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