Answer the following questions using the information below:
Sherry's Custom Jewelry sells a single product. 700 units were sold resulting in $7,000 of sales revenue, $2,800 of variable costs, and $1,200 of fixed costs.
-If sales increase by $25,000, operating income will increase by:
A)$10,000
B)$15,000
C)$22,200
D)None of these answers are correct.

Question

Quizplus · Accepted Answer

To solve the problem, we need to use the contribution margin formula: 
Contribution Margin = Sales Revenue - Variable Costs 
CM = $7,000 - $2,800 
CM = $4,200

Then, we can use the contribution margin to calculate the operating income: 
Operating Income = Contribution Margin - Fixed Costs 
OI = $4,200 - $1,200 
OI = $3,000

If sales increase by $25,000, we can use the same formula to calculate the new operating income: 
New OI = CM x (New Sales Revenue / Original Sales Revenue) - Fixed Costs 
New OI = $4,200 x ($32,000 / $7,000) - $1,200 
New OI = $19,200

Finally, we can calculate the increase in operating income: 
Increase in OI = New OI - Original OI 
Increase in OI = $19,200 - $3,000 
Increase in OI = $16,200

Therefore, the answer is B) $15,000 (rounded to the nearest thousand).

Answer the Following Questions Using the Information Below