Question

Variable costs as a percentage of sales for Lemon Inc. are 79%, current sales are $517,000, and fixed costs are $190,000. How much will operating income change if sales increase by $36,800

Answer 1

The change in operating income is $7,728.

What is the operating income?

The net operating income is total revenue less direct and indirect expenses.

The net operating income = total revenue - variable expenses - fixed costs.

Initial operating income:

• Revenue = sales = 517,000
• Variable cost = 0.79 x 517,000 = 408,430
• Fixed cost = 190,000

Operating income = 517,000 - 408,430 - 190,000 = -81,430

New operating income:

• Revenue = sales = 517,000 + 36,800 = 553,800
• Variable cost = 0.79 x  553,800 = 437,502
• Fixed cost = 190,000

Operating income = 553,800 - 437,502 - 190,000 = $-73702

Change in operating income = $-73,702 - -81,430 = $7,728

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