Variable costs as a percentage of sales for Protoveo Inc.are 65%, sales are $500,000, and fixed costs are $125,000.How much would operating income change if sales decrease by $10,000?
A) $3,500 increase
B) $3,500 decrease
C) $3,250 decrease
D) $3,500 increase.

Question

Quizplus · Accepted Answer

Variable cost as a percentage of sales is 65%, which means variable costs for Protoveo is $325,000 (65% of $500,000). 
Contribution margin (CM) = Sales - Variable Costs = $500,000 - $325,000 = $175,000. 
Operating income (before fixed costs) = CM - fixed costs = $175,000 - $125,000 = $50,000. 
If sales decrease by $10,000, the new sales will be $490,000. 
New CM = $490,000 * (100% - 65%) = $171,500. 
New operating income (before fixed costs) = New CM - fixed costs = $171,500 - $125,000 = $46,500. 
The change in operating income = $50,000 - $46,500 = $3,500 decrease.

Variable Costs as a Percentage of Sales for Protoveo Inc