Spice Inc.'s unit selling price is $60, unit variable costs are $35, fixed costs are $125,000, and current sales are 10,000 units. How much will operating income change if sales increase by 8,000 units?
A) $150,000 decrease
B) $175,000 increase
C) $200,000 increase
D) $150,000 increase

Question

Quizplus · Accepted Answer

First, calculate the contribution margin per unit:
Unit selling price - unit variable costs = contribution margin per unit
$60 - $35 = $25

Next, calculate the contribution margin ratio:
Contribution margin per unit ÷ unit selling price = contribution margin ratio
$25 ÷ $60 = 0.4167 or 41.67%

Using the contribution margin ratio, calculate the break-even point in units:
Fixed costs ÷ contribution margin ratio = break-even point in units
$125,000 ÷ 0.4167 = 300,005 units (rounded up to the nearest whole unit)

Now, calculate the current profit:
(Current sales - break-even point in units) x contribution margin per unit - fixed costs = current profit
(10,000 - 300,005) x $25 - $125,000 = -$750,000

The negative result indicates a loss.

To calculate the new operating income if sales increase by 8,000 units:
(10,000 + 8,000 - 300,005) x $25 - $125,000 = $425,000

This indicates a $425,000 increase in operating income. Therefore, the correct answer is C, $200,000 increase (closest answer choice to $425,000).

Spice Inc'S Unit Selling Price Is $60, Unit Variable Costs Are