Twenty Technologies, currently sells 17" monitors for $270. It has costs of $230. A competitor is bringing a new 17" monitor to market that will sell for $245. Management believes it must lower the price to $245 to compete in the market for 17" monitors. Twenty Technologies believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Twenty Technologies's sales are currently 5200 monitors per year.
What is the change in operating income if marketing manager is correct and only the sales price is changed?
A) $130,000
B) $122,200
C) ($122,200)
D) ($130,000)

Question

Quizplus · Accepted Answer

Increase in sales: 5200 x (1 + 10%) = 5720
Operating income with selling price of $270 = 208,000 (5200 × ($270 - $230).
Operating income with new selling price of $230 = $85,800 (5720 × ($245 - $230). Therefore, Silicon's operating income will reduce by $122,200 ($208,000 - $85,800).

Twenty Technologies, Currently Sells 17" Monitors for $270