Rozella’s income statement is as follows:
Sales(10,000 units) $120,000
Less variable costs - 48,000
Contribution margin $72,000
Less fixed costs - 24,000
Net income $ 48,000

If sales increase by 1,000 units, profits will:
a. Increase by $7,200
b. Increase by $12,000
c. Increase by $4,800
d. Increase by $8,000
e. None of these answers is correct

A. Increase by $7,200

Explanation:

Given: Sales(10,000 units) $120,000

Less variable costs - 48,000

Contribution margin $72,000

Less fixed costs - 24,000

Net income $ 48,000

The total contribution margin is the earning of the company to cover the fixed cost of the company and generate profit. It is important as it shows the amount of money available to pay a fixed cost, which is essential to run the operation of the company. It is calculated by deducting the variable costs from total sales.

Now, finding change in profit after increase in sales by 1000 units.

Contribution margin per unit=

⇒ Contribution margin per unit=

∴ Contribution margin per unit=

Multiplying the increase number of unit to the Contribution margin per unit to find change increase in profit.

Increase in profit=

∴ Increase in profit=

Hence, If sales increase by 1,000 units, profit will increase by $7200.

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