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 ​$22,000 per month Volume ​10,000 units per month The company believes that the volume will go up to​ 12,000 units if the company reduces its sales price to​ $7.50. How would this change affect operating​ income?

Answer 1

The correct answer is Decrease by $5,500.

Step-by-step explanation:

According to the scenario, the computation of the given data are as follows:

First we calculate the previous operating income, by using following formula:

Previous operating income = ($8.5 - $5.25) × 10,000 units - $22,000

= $10,500

Now, we will calculate the current operating income by using following formula:

New operating income = ($7.5 - $5.25) 12,000 units - $22,000

= $5,000

So, the change in operating income can be calculated as

Change in operating income = New operating income - Previous operating income

= $5,000 - $10,500

= -$5,500 ( Negative shows Decrease)

= Decrease by $5,500.