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Effects of Revenue Increase on a Firm

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A firm has revenues of $120,000, a contribution margin ratio of 30%, and fixed expenses that total $56,000. If revenues increase $20,000, then:

operating income will increase by $6000.
operating income will be 0.
fixed expenses will increase $8000.
the contribution margin ratio will increase by 1/8.

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Solution Summary

The solution briefly explains the answer to this multiple choice question with some calculations to back it up.

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We know that Contribution Margin = Revenue - Variable Cost

Net Income = Contribution Margin - Fixed Expenses

At the original Revenue Level of $120,000, ...

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Manal Elkhoshkhany, MBA
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  • MBA, California State University, Sacramento
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