Photography, Inc. produces and sells cameras, film, and other imaging products. A condensed 2006 income statement follows (in millions):

Assume that $1,800 million of the cost of goods sold is a fixed cost representing amortization and other production costs that do not change with the volume of production. In addition, $4,000 million of the other operating expenses is fixed. 

1. Compute the total contribution margin for 2006 and the contribution margin percentage. Explain why the contribution margin differs from the gross margin. 

2. Suppose that sales for Photography, Inc. were predicted to increase by 10 percent in 2007 and that the cost behaviour was expected to con- tinue in 2007 as it had been in 2006. Compute the predicted operating income for 2007. By what percentage did this predicted 2007 operating income exceed the 2006 operating income? 

3. What assumptions were necessary to compute the predicted 2007 operating income in requirement 2?

Transcribed Image Text:

Sales Cost of goods sold Gross margin Other operating expenses Operating income $15,968 8,326 7,642 6,086 $ 1,556