At its present level of operations, a small manufacturing firm has total variable costs equal to 75 percent of sales and total fixed costs equal to 15 percent of sales. Based on variable costing, of sales change by $1.00, income will change by

$0.25

Explanation:

The change in operating income as a result of the change in sales by $1.00 is equivalent to the additional contribution margin, computed as follow;

Additional sales

$1

Less:

Additional Variable costs ($1 × 75%)

($0.75)

Increase in operating income

$0.25

The amount left over after subtracting variable costs is the contribution margin.

Here, the total fixed cost remains unchanged hence will not be affected due to increase in sales. The fixed costs remains at 15% of sales at the present level of operations. The fixed costs as a percentage of sales will be some value less than 15% after the $1.00 increase in sales value.

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