Question

A small business produces a single product and reports the following​ data: Sales price $ 8.50 per unit Variable cost $ 5.30 per unit Fixed cost $ 21 comma 000 per month Volume 10 comma 000 units per month The company believes that the volume will go up to 13 comma 000 units if the company reduces its sales price to $ 7.25. How would this change affect operating​ income?

Answer 1

If the current price is reduced from $8.50 to $7.25 per unit, operating income will decrease by $6,650 (from $11,000 to $4,350). This happens because variable costs will increase dramatically while total revenue will only increase a little.

Step-by-step explanation:

current revenue = $8.50 x 10,000 = $85,000

- variable costs = $5.30 x 10,000 = ($53,000)

- fixed costs = ($21,000)

operating income = $11,000

alternative price = $7.25 x 13,000 = $94,250

- variable costs = $5.30 x 13,000 = ($68,900)

- fixed costs = ($21,000)

operating income = $4,350