Question

A small business produces a single product and reports the following​ data: Sales price $ 8.50 per unit Variable cost $ 5.25 per unit Fixed cost $ 23,000 per month Volume 10,500 units per month. The company believes that the volume will go up to 13,000 units if the company reduces its sales price to $ 7.25. How would this change affect operating​ income?

Answer 1

$8,125 decrease

Step-by-step explanation:

The computation of the effect of operating income is shown below:

In the first case:

Sales price $8.50 per unit

Variable cost $5.25 per unit

Fixed cost $23,000

Volume 10,500 units

The operating income would be

= (Sales price per unit - variable cost per unit) × Volume - fixed cost

= ($8.50 - $5.25) × 10,500 units - $23,000

= $11,125

In the second case:

Sales price $7.25 per unit

Variable cost $5.25 per unit

Fixed cost $23,000

Volume 13,000 units

The operating income would be

= (Sales price per unit - variable cost per unit) × Volume - fixed cost

= ($7.25 - $5.25) × 13,000 units - $23,000

= $3,000

After comparing these two cases, we get to know that the net income is decreased by $8,125