Variable Costs as a Percentage of Sales for Lemon Inc

question 125

Multiple Choice

Variable costs as a percentage of sales for Lemon Inc. are 80%, current sales are $600,000, and fixed costs are $130,000. How much will operating income change if sales increase by $40,000?

• A) $8,000 increase
• B) $8,000 decrease
• C) $30,000 decrease
• D) $30,000 increase

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Definitions:

Allowance Method

A method used in accounting to estimate and account for bad debts, representing the amount of accounts receivable that may not be collected.

Allowance for Doubtful Accounts

A contra asset account that represents the estimated portion of accounts receivable that may not be collectible.

Allowance Method

An accounting technique used to estimate and account for doubtful accounts receivable and adjust the amount of accounts receivable reported on the balance sheet.

Accounts Receivable

Money owed to a company by its customers for sales or services on credit, considered a current asset on the balance sheet.