A camera company produces and sells cameras, film, and other imaging products. A condensed 2000 income statement (in millions) includes the following:
Sales 20,991
Cost of goods sold 12,028
Gross margin 8,963
Other operating expenses 5,641
Operating income $3,322
Assume that $3.6 million of the cost of goods sold is a fixed cost representing depreciation and other production costs that do not change with the volume of production. In addition, $5 million of the other operating expenses are fixed.
1. Compute the total contribution margin for 2010 and the contribution margin percentage. Explain why the contribution margin differs from the gross margin.
2. Suppose that sales for the camera company were predicted to increase by 10% in 2011 and that the cost behavior was expected to continue in 2011 as it did in 2010. Compute the predicted operating income for 2011. By what percentage did this predicted 2011 operating income exceed the 2010 operating income?
3. What assumptions were necessary to compute the predicted 2011 operating income in question 2?