Herrell Corporation manufactures numerous products, one of which is called Delta11. The company has provided the following data about this product: Management is considering increasing the price of Delta11 by 5%, from $29.00 to $30.45. The company's marketing managers estimate that this price hike would decrease unit sales by 10%, from 110,000 units to 99,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will product Delta11 earn at a price of $30.45 if this sales forecast is correct?
A) $1,133,550
B) $123,550
C) $249,500
D) $1,259,500

Question

Herrell Corporation manufactures numerous products, one of which is called Delta11. The company has provided the following data about this product:  Management is considering increasing the price of Delta11 by 5%, from $29.00 to $30.45. The company's marketing managers estimate that this price hike would decrease unit sales by 10%, from 110,000 units to 99,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will product Delta11 earn at a price of $30.45 if this sales forecast is correct?
A) $1,133,550 
B) $123,550 
C) $249,500 
D) $1,259,500

Quizplus · Accepted Answer

Current price per unit = $29.00
Current unit sales = 110,000 units
Total Revenue = Current price per unit * Current unit sales = $3,190,000

New price per unit = $30.45
New unit sales = 99,000 units
Total Revenue = New price per unit * New unit sales = $3,015,150

The percentage decrease in unit sales = [(110,000 - 99,000)/110,000] * 100% = 10%

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

Let's assume that the variable cost per unit remains the same at $20.00.

Contribution margin per unit = $30.45 - $20.00 = $10.45

Total traceable fixed expenses = $1,140,000

Net operating income before the price increase = Total Revenue - Variable expenses - Fixed expenses
= ($29.00 * 110,000) - ($20.00 * 110,000) - $1,140,000
= $1,190,000 - $2,200,000 - $1,140,000
= -$1,150,000

Net operating income after the price increase = Total Revenue - Variable expenses - Fixed expenses
= ($30.45 * 99,000) - ($20.00 * 99,000) - $1,140,000
= $3,008,550 - $1,980,000 - $1,140,000
= -$111,450

The price increase results in a net operating loss of $111,450. However, the question asks for the net operating income, so we need to subtract the loss from the current net operating income:

Net operating income = Net operating income before the price increase - Net operating loss due to the price increase
= -$1,150,000 - (-$111,450)
= $1,038,550

Therefore, the net operating income for Delta11 at a price of $30.45 with a 10% decrease in unit sales is $123,550 (Choice B).

Herrell Corporation Manufactures Numerous Products, One of Which Is Called