Question

International Data Systems' information on revenue and costs is relevant only up to a sales volume of 121,000 units. After 121,000 units, the market becomes saturated and the price per unit falls from $10.00 to $6.80. Also, there are cost overruns at a production volume of over 121,000 units, and variable cost per unit goes up from $5.00 to $5.25. Fixed costs remain the same at $71,000.

Required:
a. Compute operating income at 121,000 units.
b. Compute operating income at 221,000 units.

Answer 1

a. $534,000

b. $271,550

Step-by-step explanation:

a. Compute operating income at 121,000 units

Using this formula

Operating Income = (Price per unit - Variable cost per unit)*Units - Fixed costs

Let plug in the formula

Operating Income = ($10.00 - $5.00)*121,000 - $71,000

Operating Income = ($5.00)*121,000 - $71,000

Operating Income =$605,000-$71,000

Operating Income = $534,000

Therefore operating income at 121,000 units is $534,000

b. Compute operating income at 221,000 units

Using this formula

Operating Income = (Price per unit - Variable cost per unit)*Units - Fixed costs

Let plug in the formula

Operating Income = ($6.80 - $5.25)*221,000 - $71,000

Operating Income = $1.55*221,000-$71,000

Operating Income = $342,550-$71,000

Operating Income = $271,550

Therefore operating income at 121,000 units at 221,000 units is $271,550