Question

Pittsboro Corporation produces and sells a single product. Data for that product​ are:Sales price per unit​$500Variable cost per unit​$320Fixed expenses for the month​$1,000,000Currently selling​4,000 unitsManagement is discussing increasing the price to​ $525 to cover an increase in fixed expenses of​ $80,000. Management believes they might lose​ 2% of sales per month. What should be the overall effect on the​ company's monthly operating income if this change is​ implemented?

Answer 1

Increase in operating income $ 3,600

Step-by-step explanation:

The impact on operating income will be done using incremental analysis.

Here we consider only the impact of the proposed change on the income

This is done as follows: $

Contribution before (​4,000 × $(500- 320) = 720,000

Contribution after - (98%× 4,000)× (525-320) = 803,600

Increase in contribution 83600

Increase in Fixed expenses ( 80,000)

Increase in operating income 3,600