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21 March, 04:33

Variable costs as a percentage of sales for Lemon Inc. are 62%, current sales are $563,000, and fixed costs are $189,000. How much will operating income change if sales increase by $39,200

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  1. 21 March, 05:01
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    Effect on income = $14,896 increase

    Explanation:

    Giving the following information:

    Variable costs = 62% of sales

    Current sales are $563,000

    Fixed costs are $189,000.

    Sales increase by $39,200.

    To calculate the effect on income, we need to use the following formula:

    Effect on income = sales increase*contribution margin ratio

    Effect on income = 39,200 * (1 - 0.62)

    Effect on income = $14,896 increase

    Prove:

    Actual income = 563,200*0.38 - 189,000 = 25,016

    New income = 602,400*0.38 - 189,000 = 39,912

    Difference = $14,896 increase
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