Profit Increase from Sales Growth with Constant Fixed Costs

Steps:

• Current contribution margin: 40% × $100,000 =$40,000
• Current profit: $40,000 -$30,000 = $10,000
• New sales revenue: $100,000 × 1.20 =$120,000
• New contribution margin: 40% × $120,000 =$48,000; new profit: $48,000 -$30,000 = $18,000; increase:$18,000 - $10,000 =$8,000

Why A is correct:

• Contribution to sales ratio means variable costs are 60% of sales; profit rises by the full contribution from the sales increase ($20,000 × 40$8,000), as fixed costs remain fixed per break-even analysis.

Why the others are wrong:

• B: Equals new profit ($18,000), not the increase from current profit.
• C: Overstates by adding full sales increase ($20,000) plus current profit ($10,000) incorrectly.
• D: Assumes no variable costs, treating entire sales increase ($20,000) as profit gain.

Final answer: A