Question

Adam's sports store sells an item with a contribution margin ratio of 55% and total fixed costs of $8,000. If Adam generates additional sales of $25,000 for this item, net operating income will increase by ______.

a. $11,250

b. $13,750

c. $3,250

d. $5,750

Answer 1

By multiplying the additional sales of $25,000 by the contribution margin ratio of 55%, we find that the net operating income will increase by $13,750, making option (b) the correct answer.

Step-by-step explanation:

The student's question involves calculations related to the concept of contribution margin ratio, which is used to analyze the profitability of a product or service. Given that Adam's sports store has a contribution margin ratio of 55% and fixed costs of $8,000, to find out by how much the net operating income will increase with additional sales of $25,000, we use the formula:

Increased Net Operating Income = Additional Sales × Contribution Margin Ratio

This yields:

Increased Net Operating Income = $25,000 × 0.55 = $13,750

Therefore, the correct answer is b. $13,750, as this is the amount by which the net operating income will increase given the additional sales and contribution margin ratio mentioned.