Tutor, Inc. (TI) provides instructional services to its customers. TI charges $400 per student. The Company expects to serve 1,500 students during the coming year. All of the Company's expenses are fixed. Total annual fixed cost are projected to be $160,000. If the estimated number of students increase by 10%, net income will increase by

Tutor, Inc. (TI) provides instructional services to its customers. TI charges $400 per student. The Company expects to serve 1,500 students during the coming year. All of the Company's expenses are fixed. Total annual fixed cost are projected to be $160,000. If the estimated number of students increase by 10%, net income will increase by: (Round your final answer to the nearest percent.)

Multiple Choice

• 14%.

  Correct
• 30%.
• 20%.
• 10%.

Explanation

Note that operating leverage magnifies the impact that changes in volume have on revenue and net income. In this case, a 10% increase in units sold results in a 14% increase in net income. Supporting computations are shown below.

Net income at base point:
Revenue ($400 × 1,500 students)	$	600,000
Fixed expenses		160,000
Net income	$	440,000

Net income after 10% increase:
Increase in volume 1,500 × 1.10 = 1,650
Revenue ($400 × 1,650 students)	$	660,000
Fixed expenses		160,000
Net income	$	500,000

% change (500,000 − 440,000) / 440,000 = 14%