Question

Riven Corporation has a single product whose selling price is $10. At an expected sales level of $1,000,000, the company's variable expenses are $600,000 and its fixed expenses are $300,000. The marketing manager has recommended that the selling price be increased by 20%, with an expected decrease of only 10% in unit sales. What would be the company's net operating income if the marketing manager's recommendation is adopted?

a. $132,000b. $290,000c. $180,000d. $240,000

Answer 1

The answer is 240.000

Step-by-step explanation:

In this case you have to draft the first scenario and then calculate the new scenario with the given information

units price/cost total

Revenue 100,000.00 10.00 1,000,000.00

Variable expenses 100,000.00 6.00 (600,000.00)

Contribution margin 100,000.00 4.00 400,000.00

Fixed expenses (300,000.00)

Net income 100,000.00

then calculate the new revenue

New price is = (price*(1+selling price increase)) = 10*1.2 = 12

Calculate the expected units

Expected units = (actual units sold*(1-decrease in sales)= (100.000*(1-0.1)) = 90.000

Revenue 90,000.00 12.00 1,080,000.00

Variable expenses 90,000.00 6.00 (540,000.00)

Contribution margin 90,000.00 6.00 540,000.00

Fixed expenses (300,000.00)

Net income 240,000.00