Business, 24.03.2020 16:41 macinnoodlezz

A contribution income statement for the Nantucket Inn is shown below. (Ignore income taxes.) Revenue $ 2,000,000 Less: Variable expenses 1,300,000 Contribution margin $ 700,000 Less: Fixed expenses 560,000 Net income $ 140,000 Required: 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 30 percent. 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 $2,000,000? 4. Use the operating leverage factor to calculate the increase in net income resulting from a 25 percent increase in sales revenue.

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Answer from: victoriagonzale6

Solution

1.Hotel’s cost structure Indications in percentage(%)

Revenue $ 2,000,000 (100)

Less: Variable expenses $ 1,300,000 65

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Contribution margin $700,000

Less: Fixed expenses $560,000 28

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Net income $140,000 7

2.Revenue declines by 30 percent

Revenue $ 1,400,000 (2,000,000×70÷100)

Less: Variable expenses $910,000 ( 1,300,000 ×70÷100)

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Contribution margin $490,000 ( 700,000 ×70÷100)

Less: Fixed expenses $392,000 ( 5,60,000 ×70÷100)

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Net income $98,000 ( 140,000 ×70÷100))

3.Operating leverage factor when revenue is $2,000,000

Operating leverage = Contribution/ Net income

=700,000÷ 140,000=5

4.Operating leverage factor when increase in revenue by 25 percent

increase in revenue by 25 percent= 2,000,000×25÷100 = 500,000

increase in contribution by 25 percent= 700,000×25÷100=175,000

increase in net income by 25 percent = 140,000×25÷100=35,000

Operating leverage = Contribution/ Net income

= 875,000 ÷ 175,000 = 5

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

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