Spice Inc.'s unit selling price is $46, the unit variable costs are $31, fixed costs are $106,000, and current sales are 9,600 units. How much will operating income change if sales increase by 5,600 units? O a. $144,000 decrease Ob. $228,000 increase Oc. $144,000 increase Od. $84,000 increase
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
![### Operating Income Change Analysis for Spice Inc.
**Question:**
Spice Inc.'s unit selling price is $46, the unit variable costs are $31, fixed costs are $106,000, and current sales are 9,600 units. How much will operating income change if sales increase by 5,600 units?
**Options:**
- a. $144,000 decrease
- b. $228,000 increase
- c. $144,000 increase
- d. $84,000 increase
**Explanation and Solution:**
To calculate the change in operating income, follow these steps:
1. **Determine the contribution margin per unit:**
\[
\text{Contribution Margin} = \text{Selling Price per Unit} - \text{Variable Cost per Unit}
\]
\[
\text{Contribution Margin} = \$46 - \$31 = \$15 \text{ per unit}
\]
2. **Calculate the increase in contribution margin from increased sales:**
\[
\text{Increase in Units Sold} = 5,600 \text{ units}
\]
\[
\text{Total Increase in Contribution Margin} = \text{Increase in Units Sold} \times \text{Contribution Margin per Unit}
\]
\[
\text{Total Increase in Contribution Margin} = 5,600 \times \$15 = \$84,000
\]
Since the fixed costs remain unchanged with the increase in sales, the entire increase in contribution margin translates to an increase in operating income.
**Answer:**
- d. $84,000 increase](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F50c4a886-3e07-4312-95fc-3240a8ded880%2F12a925f4-454b-4b59-b2fd-77c23c8c38e0%2F05b64t_processed.jpeg&w=3840&q=75)
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