Question

Fruit Computer Company makes a fruit themed computer. Variable costs are $200 per unit, and fixed costs are $31,000 per month. Fruit Computer Company sells 400 units per month at a sales price of $320. The company believes that it can increase the price if the computer quality is upgraded. If so, the variable cost will increase to $240 per unit, and the fixed costs will rise by 25%. The CEO wishes to increase the company's operating income by 35%. Which sales price level would give the desired results? (Round your answer to the nearest cent.)

Group of answer choices
a. $1088.00 per unit
b. $394.25 per unit
c. $277.50 per unit
d. $362.50 per unit

Answer 1

To find the sales price level that would give the desired results, calculate the operating income for the current and potential sales prices, and then determine the price level that will give the desired increase in operating income.

Step-by-step explanation:

To find the sales price level that would give the desired results, we need to calculate the operating income for the current sales price and the potential sales price after the computer quality upgrade.

Current operating income = (sales price - variable cost) * number of units - fixed costs

Potential operating income = (sales price + upgrade amount - upgraded variable cost) * number of units - upgraded fixed costs

By setting up and solving these equations, we can find the sales price level that will give the desired increase in operating income.

After performing the calculations, the sales price level that would give the desired results is $394.25 per unit (option b).