Asked by Teigan Catlin on May 25, 2024
Verified
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?
A) $8,000 increase
B) $8,000 decrease
C) $30,000 decrease
D) $30,000 increase
Operating Income
Income from a company's main business operations, excluding expenses and revenues from non-operational activities.
Variable Costs
Expenses that vary directly with the level of production or sales volume, such as materials and labor.
Fixed Costs
Costs that remain constant regardless of the amount of goods produced or sold, including expenses like rent, wages, and insurance premiums.
- Evaluate the consequences of sales volume adjustments on the operating profit.
Verified Answer
KP
Kavina PatelMay 27, 2024
Final Answer :
A
Explanation :
With variable costs at 80% of sales, a $40,000 increase in sales results in a $32,000 increase in variable costs (80% of $40,000). The remaining $8,000 ($40,000 - $32,000) contributes to covering fixed costs and then to operating income, leading to an $8,000 increase in operating income.
Learning Objectives
- Evaluate the consequences of sales volume adjustments on the operating profit.