Question

Variable costs as a percentage of sales for lemon inc. are 80%, current sales are $600,000, and fixed costs are $130,000. How much will operating income change if sales increase by $40,000?

Answer 1

When sales increase by $40,000, operating income will change by $-12,000.

By how much would operating income change?

The net operating income is total revenue less direct and indirect expenses. Direct expense is variable cost and indirect expenses are fixed costs.

Operating income = total revenue - variable expenses - fixed costs

Initial operating income: 600,0000 - (0.8 x 600,000) - 130,000 = -10,000

New operating income: (600,000 + 40,000) - [0.8 x (600,000 + 40,000)] - 130,000 = 2,0000

Change in operating income: -10,000 - 2,000 = $-12,000

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