Questions: Variable costs as a percentage of sales for Lemon Inc. are 70%, current sales are 547,000, and fixed costs are 182,000. How much will operating income change if sales increase by 46,400? a. 32,480 decrease b. 32,480 increase c. 13,920 increase d. 13,920 decrease

Solution Steps

To determine how much the operating income will change if sales increase by $46,400, we need to follow these steps:

1. Calculate the variable costs associated with the increase in sales.
2. Determine the contribution margin (sales minus variable costs).
3. Calculate the change in operating income by subtracting the increase in variable costs from the increase in sales.

The variable costs as a percentage of sales is given as \( 70\% \) or \( 0.70 \). The increase in sales is \( \$ 46,400 \). Therefore, the increase in variable costs can be calculated as:

\[ \text{Increase in Variable Costs} = \text{Increase in Sales} \times \text{Variable Cost Percentage} = 46400 \times 0.70 = 32480 \]

The change in operating income is determined by subtracting the increase in variable costs from the increase in sales:

\[ \text{Change in Operating Income} = \text{Increase in Sales} - \text{Increase in Variable Costs} = 46400 - 32480 = 13920 \]

Final Answer