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Contribution income statement

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

Revenue.............................................$500,000
Less: Variable expenses............................300,000
Contribution margin................................$200,000
Less: Fixed expenses.................................150,000
Net income...........................................$ 50,000

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 15%. 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 $500,000?
4. Use the operating leverage factor to calculate the increase in net income resulting from a 20% increase in sales revenue.

Solution Preview

1. Variable expense = 300,000/500,000=60%
Contribution margin = 200,000/500,000=40%
Fixed expeneses=150,000/500,000 = 30%
Net Income = ...

Solution Summary

The solution explains how to use a contribution income statement to do the required calculations.

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