The McPherson Company is facing an increase in the variable cost of producing and selling one of its products for the upcoming year. As a result, the sales manager has made a proposal to increase the selling price of the product while increasing the advertising budget at the same time. McPherson has provided the following information regarding the current year results and the proposal made by the sales manager:
$$\begin{array} { | l | r | r | }
\hline & \text { Current Year } & { \text { Proposal } } \
\hline \text { Unit sales } & 27,000 & 18,000 \
\hline \text { Sales price per unit } & \$ 48 & \$ 58 \
\hline \text { Variable cost per unit } & \$ 30 & \$ 36 \
\hline \text { Fixed costs } & \$ 76,000 & \$ 96,000 \
\hline
\end{array}$$ Relative to the current year, the sales manager's proposal will:
A) decrease operating income by $90,000.
B) increase contribution margin by $90,000.
C) decrease the unit breakeven point.
D) decrease operating income by $110,000.

Question

The McPherson Company is facing an increase in the variable cost of producing and selling one of its products for the upcoming year. As a result, the sales manager has made a proposal to increase the selling price of the product while increasing the advertising budget at the same time. McPherson has provided the following information regarding the current year results and the proposal made by the sales manager:
$$\begin{array} { | l | r | r | } 
\hline & \text { Current Year } & { \text { Proposal } } \
\hline \text { Unit sales } & 27,000 & 18,000 \
\hline \text { Sales price per unit } & \$ 48 & \$ 58 \
\hline \text { Variable cost per unit } & \$ 30 & \$ 36 \
\hline \text { Fixed costs } & \$ 76,000 & \$ 96,000 \
\hline
\end{array}$$ Relative to the current year, the sales manager's proposal will:
A) decrease operating income by $90,000.
B) increase contribution margin by $90,000.
C) decrease the unit breakeven point.
D) decrease operating income by $110,000.

Quizplus · Accepted Answer

The operating income for the current year and under the proposal can be calculated as follows:Current Year:- Revenue = 27,000 units * $48/unit = $1,296,000- Variable Costs = 27,000 units * $30/unit = $810,000- Fixed Costs = $76,000- Operating Income = Revenue - Variable Costs - Fixed Costs = $1,296,000 - $810,000 - $76,000 = $410,000Proposal:- Revenue = 18,000 units * $58/unit = $1,044,000- Variable Costs = 18,000 units * $36/unit = $648,000- Fixed Costs = $96,000- Operating Income = Revenue - Variable Costs - Fixed Costs = $1,044,000 - $648,000 - $96,000 = $300,000Change in Operating Income = $300,000 (Proposal) - $410,000 (Current Year) = -$110,000Therefore, the proposal will decrease operating income by $110,000.

The McPherson Company Is Facing an Increase in the Variable