Explanation

Operating income (also known as operating profit or EBIT - Earnings Before Interest and Taxes) is calculated as:

Operating Income = Gross Profit - Operating Expenses

Where operating expenses typically include:

• Administrative costs
• Selling expenses
• Research and development costs
• Depreciation and amortization

Key points:

1. Income taxes are not part of operating income calculation - they come after operating income in the income statement (Operating Income → Interest Expense → Pre-tax Income → Income Taxes → Net Income).

2. Interest charges are financing costs, not operating expenses. They are deducted from operating income to arrive at pre-tax income.

3. Administrative costs are operating expenses that directly reduce operating income. A decrease in administrative costs would increase operating income.

Therefore:

• A decrease in income taxes would increase net income but not operating income.
• A decrease in interest charges would increase pre-tax income and net income but not operating income.
• A decrease in administrative costs would directly increase operating income.

Correct Answer: C - A decrease in administrative costs most likely increases a manufacturing company's operating income.