How do changes in activity affect contribution margin and net operating income ? Solution Contribution Margin the difference between sales revenue and variable expenses Then we deduct fixed expenses to arrive at the net income Statement showing computation of contribution and net income Particulars Amount Amount per unit Sales Less : Variable Cost Contribution Less : Fixed Expenses Income Sales, VC and contribution can be experessed In terms of per unit Fixed costs will remain same whatever may be the level of activity Thus if there is any change in activity then contribution will change. Since contribution is changing net income will also change. But change in contribution for increase and decrease in level of activity will be the same as change in net income since fixed will remain unaffected by increase and decrease in level of activity The contribution format income statement can be expressed in the following equation: Profit = (Sales – Variable expenses) – Fixed expenses .

1. How do changes in activity affect contribution margin and net operating income ?
Solution
Contribution Margin the difference between sales revenue and variable expenses Then we deduct
fixed expenses to arrive at the net income Statement showing computation of contribution and
net income Particulars Amount Amount per unit Sales Less : Variable Cost Contribution Less :
Fixed Expenses Income Sales, VC and contribution can be experessed In terms of per unit Fixed
costs will remain same whatever may be the level of activity Thus if there is any change in
activity then contribution will change. Since contribution is changing net income will also
change. But change in contribution for increase and decrease in level of activity will be the same
as change in net income since fixed will remain unaffected by increase and decrease in level of
activity The contribution format income statement can be expressed in the following equation:
Profit = (Sales – Variable expenses) – Fixed expenses