O'Neill, Incorporated's segmented income statement for the most recent month is given below. For each of the following questions, refer back to the above original data. If Store B sales increase by $20, 000 with no change in fixed expenses, the overall company net operating income should:
A)increase by $2, 500
B)increase by $5, 000
C)increase by $8, 000
D)increase by $12, 000

Question

O'Neill, Incorporated's segmented income statement for the most recent month is given below.  For each of the following questions, refer back to the above original data. If Store B sales increase by $20, 000 with no change in fixed expenses, the overall company net operating income should:
A)increase by $2, 500 
B)increase by $5, 000 
C)increase by $8, 000 
D)increase by $12, 000

Quizplus · Accepted Answer

Store B CM ratio = Contribution margin ÷ Sales = $80, 000 ÷ $200, 000 = 0.40
Change in contribution margin = CM ratio × Change in sales = 0.40 × $20, 000 = $8, 000
Fixed expenses are not affected, so the $8, 000 increase in contribution margin should increase net operating income by $8, 000.

O'Neill, Incorporated's Segmented Income Statement for the Most Recent Month