Question

Compex Inc. produces microprocessors for laptops. Last year, the company recognized revenues of $2,000,000. Total costs for the period were $1,000,000, of which $250,000 were fixed.

If sales were to increase by $300,000, by how much would Computate’s operating income increase? NOTE: round values in intermediate calculations to two decimal points.

Answer 1

Answer :

Step 1:

Operating Income = Sales Revenue - Total Cost = 2,000,000 - 1,000,000 = $1,000,000

Total Cost = Fixed Cost + Variable Cost

Fixed Cost = $250,000

Variable Cost = $ 750,000

Then let us find ,

Variable Cost Ratio = Variable cost / Sales

= 75,000/2,000,000 = 37.5 %

Step 2:

Given ,

Sales increase by $300,000

Total Sales = 2,300,000

Total Varaible Cost ( 2,300,000 * 37.5%) = 8,62,500

Total Fixed Cost = 250,000

Operating income = 1,187,500

Increase in Operating Income = $1,187,500 -$1,000,000 = $187,500