Twisdale Corporation manufactures numerous products, one of which is called Omicron-52. The company has provided the following data about this product: Management is considering decreasing the price of Omicron-52 by 4%, from $42.00 to $40.32. The company's marketing managers estimate that this price reduction would increase unit sales by 5%, from 160,000 units to 168,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will product Omicron 52 earn at a price of $40.32 if this sales forecast is correct?
A) $2,131,200
B) $61,200
C) $167,760
D) $2,237,760

Question

Twisdale Corporation manufactures numerous products, one of which is called Omicron-52. The company has provided the following data about this product:  Management is considering decreasing the price of Omicron-52 by 4%, from $42.00 to $40.32. The company's marketing managers estimate that this price reduction would increase unit sales by 5%, from 160,000 units to 168,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will product Omicron 52 earn at a price of $40.32 if this sales forecast is correct?
A) $2,131,200 
B) $61,200 
C) $167,760 
D) $2,237,760

Quizplus · Accepted Answer

To calculate the net operating income, we need to first determine the contribution margin per unit:

Contribution margin per unit = Selling price per unit - Variable expenses per unit

The selling price per unit after the price reduction of 4% is $40.32, and the variable expenses per unit are given as follows:

Direct materials: $13.44 
Direct labor: $5.04 
Variable manufacturing overhead: $2.16 
Variable selling expenses: $1.68

Total variable expenses per unit = $22.32

Contribution margin per unit = $40.32 - $22.32 = $18.00

Next, we can calculate the total contribution margin by multiplying the contribution margin per unit by the expected unit sales:

Total contribution margin = Contribution margin per unit x Expected unit sales 
= $18.00 x 168,000 = $3,024,000

Since the total traceable fixed expenses do not change, the net operating income can be computed as follows:

Net operating income = Total contribution margin - Total traceable fixed expenses 
= $3,024,000 - $2,856,240 
= $167,760

Therefore, the correct answer is C.

Twisdale Corporation Manufactures Numerous Products, One of Which Is Called