A company has sales of $87,500 at the break-even point and fixed costs are $35,000.Assuming cost behaviour does not change if sales increase by $20,000 how much will operating income will increase by?
A) $20,000.00.
B) $12,000.00.
C) $8,000.00.
D) $4,000.00.

Question

Quizplus · Accepted Answer

At the break-even point, sales cover all fixed and variable costs, so any additional sales contribute to operating income. The contribution margin ratio is ($87,500 - $35,000) / $87,500 = 0.6. Therefore, a $20,000 increase in sales will increase operating income by $20,000 * 0.6 = $12,000.

A Company Has Sales of $87,500 at the Break-Even Point