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Question

Variable costs as a percentage of sales for Lemon Inc. are 71%, current sales are $551,000, and fixed costs are $207,000. How much will operating income change if sales increase by $37,600? a.$10,904 increase b.$26,696 decrease c.$26,696 increase d.$10,904 decrease

Answer

The operating income has increased by $10,904. Explanation: As per the calculation, the operating income before the sales increase was negative $47,210 which was due to the high variable costs and fixed costs. However, after the sales increase, the revenue increased to $588,600. Even with the increase in cost, the new operating income was negative $36,306. The difference between the two operating incomes is $10,904, indicating that the operating income has increased by this amount.