Question

XYZ Manufacturing produces a single product that sells for $105. Variable costs per unit equal $74. The company expects total fixed costs to be $97,000 for the next month at the projected sales level of 3,200 units. To improve performance, management is considering several alternative actions. Each situation is to be evaluated separately. Suppose that management believes that a 10% reduction in the selling price will result in a 10% increase in sales. If this proposed reduction in selling price is implemented:__________

a. operating income will decrease by $8,000.
b. operating income will increase by $8,000.
c. operating income will decrease by $16,000.
d. operating income will increase by $16,000.

Answer 1

Effect on income= $6,880 increase

Step-by-step explanation:

First, we need to calculate the new selling price and the increase in the number of units sold:

Selling price= 105 / (1.1)= $95.5

Increase in number of units sold= 3,200*0.1= 320

Now, the effect on the income of the changes:

Effect on income= increase in total contribution margin

Effect on income= 320*(95.5 - 74)

Effect on income= $6,880 increase