Question

Tally Corp. sells software during the recruiting seasons. During the current​ year, 18 comma 000 software packages were sold resulting in $ 450 comma 000 of sales​ revenue, $ 130 comma 000 of variable​ costs, and $ 50 comma 000 of fixed costs. If sales increase by $ 80 comma 000​, operating income will increase by​ ________. (Round interim calculations to two decimal places and the final answer to the nearest whole​ dollar.)

Answer 1

Answer:

operating income will increase by $56,889

Explanation:

current income statement:

total revenue           $450,000

- variable costs       ($130,000)

gross margin           $320,000

- fixed costs             ($50,000)

operating income   $270,000

income statement with sales increase:

total revenue          $530,000

- variable costs         ($153,111)

gross margin            $376,889

- fixed costs             ($50,000)

operating income    $326,889

operating income will increase by $56,889

variable costs = $130,000 / $450,000 = 28.89%

Answer 2

Answer:

$26,300.

Explanation:

The operating income for the current year is $270,000 (450,000 - 130,000 - 50,000). When sales change, variable costs also change with the change of output, but fixed cost remains the same. So we have to calculate the variables costs when sales increase by $80,000. To do so, variable expense ratio, calculated as variable expense / sales, will be used.

So, variable expense ratio is .29 (130,000 / 450,000).

Calculation for Change in Operating Income when sales are $530,000 (450,000 + 80,000) is as follows:

Sales revenue                                                                    $530,000

Variable costs (530,000 * .29)                                           (153,700)

Fixed costs                                                                           (80,000)

Operating Income                                                             $296,300

⇒ Operating Income will increase by $26,300 (296,300 - 270,000) when sales increase by $80,000.