Answer the following questions using the information below:
Silicon Technologies, currently sells 17" monitors for $270. It has costs of $210. A competitor is bringing a new 17" monitor to market that will sell for $230. Management believes it must lower the price to $230 to compete in the market for 17" monitors. Silicon believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Silicon's sales are currently 5,000 monitors per year.
-What is the change in operating income if marketing manager is correct and only the sales price is changed?
A) $200,000
B) $190,000
C) $(190,000)
D) $(200,000)

Question

Quizplus · Accepted Answer

The change in operating income is calculated as follows:

Current revenue = 5,000 x $270 = $1,350,000 
Current costs = 5,000 x $210 = $1,050,000 
Current operating income = $1,350,000 - $1,050,000 = $300,000

New revenue = 5,000 x $230 x 1.1 = $1,265,000 
New costs = 5,000 x $210 = $1,050,000 
New operating income = $1,265,000 - $1,050,000 = $215,000

The change in operating income is therefore: 
$215,000 - $300,000 = $(85,000) or $(190,000) rounded to the nearest thousand.

Therefore, the best choice is C, as it is the correct answer to the question. The company will experience a decrease in operating income if it lowers the price to compete with the new competitor.

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