Rihanna, Inc. sells watches for $100 per watch. The variable expenses are $20 per unit, and the fixed expenses total $80,000 per period. By how much will net operating income change if watch sales are expected to increase by $400,000

Question

Terrance Huerta

Business

8 April, 13:18

Rihanna, Inc. sells watches for $100 per watch. The variable expenses are $20 per unit, and the fixed expenses total $80,000 per period. By how much will net operating income change if watch sales are expected to increase by $400,000

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Answers (1)

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Jacquelyn Byrd · Answer 1

Net operating income = $240,000

Explanation:

At first we have to determine the break-even sales.

We know,

Break-even sales in units = Fixed expense : (Sales price per unit - Variable cost per unit)

Break-even sales in units = $80,000 : ($100 - 80)

Break-even sales in units = $80,000 : $20 = 4,000 units.

Therefore, if the company sells 4,000, there will be no operating income.

If the total sales of Rihanna, Inc. is increased by $400,000, it means the company sells $400,000 : $100 = 4,000 more units.

Therefore,

Sales = $400,000

Less: Variable expense (4,000*$40) = $160,000

Contribution Margin = $240,000

The new net operating income will be $240,000 as the fixed expense remains same for the entire period.