Question

Selling price per unit - 100

Variable expenses per unit - 40
Fixed expenses per month - 60,000
If sales volume were to decrease 10% from 4,000 to 3,600 per month, operating income would:
a) Not change
b) Decrease 10,000
c) Decrease 24,000
d) Decrease 40,000

Answer 1

Operating income would decrease by $24,000 when sales volume decreases from 4,000 to 3,600 units, because the reduction in contribution margin exceeds the fixed expenses.

Step-by-step explanation:

To calculate how operating income will change if sales volume decreases by 10% from 4,000 to 3,600 units per month, we can use the given information. The selling price per unit is $100, and the variable expense per unit is $40. With a fixed expense of $60,000 per month, the contribution margin per unit, which is the selling price minus the variable expense, is $60. To find the operating income, we can multiply the contribution margin by the sales volume and then subtract the fixed expenses.

Before the decrease, the operating income is:

(4,000 units x $60 contribution margin per unit) - $60,000 fixed expenses = $180,000 operating income.

After a 10% decrease to 3,600 units:

(3,600 units x $60 contribution margin per unit) - $60,000 fixed expenses = $156,000 operating income.

Thus, the operating income would decrease by:

$180,000 - $156,000 = $24,000.

So, the correct answer is c) Decrease $24,000.