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

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