Merced Corporation is considering adding a new product line. Market research indicates that sales revenue for the new line would be $80,000 for 35,000 units. Variable costs would be $1.70 per unit; direct fixed costs, $0.40 per unit; and indirect fixed costs, $0.50 per unit. If Merced added the new line, its income would:

Question

Quizplus · Accepted Answer

First, we need to calculate the total cost per unit:

Variable cost per unit + Direct fixed cost per unit + Indirect fixed cost per unit = Total cost per unit
$1.70 + $0.40 + $0.50 = $2.60

Next, we can calculate the total costs for the new product line:

Total cost per unit x Number of units = Total cost
$2.60 x 35,000 = $91,000

To find the income, we subtract the total costs from the sales revenue:

Sales revenue - Total cost = Income
$80,000 - $91,000 = -$11,000

This means that adding the new product line would result in a decrease in income of $11,000. However, the question asks for the change in income, not the actual income with the new product line. So, we need to subtract the current income from the income with the new product line:

Income with new product line - Current income = Change in income
$(-11,000) - $(-17,500) = $6,500

Therefore, the income would increase by $6,500 if Merced Corporation added the new product line. Choice B is the correct answer.

Merced Corporation Is Considering Adding a New Product Line