LSB Company has the following income statement:
Revenues $100,000
Variable costs 40,000
Contribution margin 60,000
Fixed costs 30,000
Operating Income 30,000
If LSB's sales increase by $20,000, what will be the company's operating profit?
a) $42,000
b) $12,000 <-------------------------- answer
c) $50,000
d) $30,000
The answer "b")12,000 is already given but I don't know how the answer key got that answer. Can someone explain to me where 12,000 operating profit came from?
I'm also a little confused because of of the wording.... is operating profit the same as operating income? please show your work and thanks in advance!
Solution:
Contribution margin ratio = $60,000 / $100,000 = 60%
If LSB sales increases by $20,000, then increase in operating income of LSB = Increase in sales * CM ratio
= $20,000*60% = $12,000
Therefore operating profit increase by $12,000
Revised net operating income = $30,000 + $12,000 = $42,000
LSB Company has the following income statement: Revenues $100,000 Variable costs 40,000 Contribution margin 60,000 Fixed...