Bell Brothers has $3,000,000 in sales.Fixed costs are estimated to be $100,000 and variable costs are equal to 50% of sales.The company has $1,000,000 in debt outstanding at a before-tax cost of 10%.If Bell Brothers' sales were to increase by 20%,how much of a percentage increase would you expect in the company's net income?
A)18.80%
B)19.79%
C)20.83%
D)21.92%
E)23.08%

Question

Quizplus · Accepted Answer

When sales increase by 20%, variable costs also increase by 20%. The contribution margin (sales - variable costs) increases, and fixed costs remain constant. The increase in contribution margin leads to a higher percentage increase in net income due to the fixed nature of some costs. Calculating the new net income and comparing it to the original net income shows a 23.08% increase.

Bell Brothers Has $3,000,000 in Sales