Claire Corporation's contribution margin income statement for March is as follows:
$$\begin{array} { | l | r | }
\hline \text { Sales (2,500 units) } & \$ 112,500 \
\hline \text { Variable expenses } & 78,750 \
\hline \text { Contribution margin } & \$ 33,750 \
\hline \text { Fixed expenses } & 15,000 \
\hline \text { Operating income } & \$ 18,750 \
\hline
\end{array}$$ Claire's manager has proposed that the unit selling price be increased by 10% for the month of April. The manager believes that the selling price increase will result in a 250 unit decrease in sales during April. Should the manager's proposal be accepted?

Question

Claire Corporation's contribution margin income statement for March is as follows:
$$\begin{array} { | l | r | } 
\hline \text { Sales (2,500 units) } & \$ 112,500 \
\hline \text { Variable expenses } & 78,750 \
\hline \text { Contribution margin } & \$ 33,750 \
\hline \text { Fixed expenses } & 15,000 \
\hline \text { Operating income } & \$ 18,750 \
\hline
\end{array}$$ Claire's manager has proposed that the unit selling price be increased by 10% for the month of April. The manager believes that the selling price increase will result in a 250 unit decrease in sales during April. Should the manager's proposal be accepted?

Quizplus · Accepted Answer

With the proposed 10% increase in selling price, each unit's selling price rises from $45 ($112,500 / 2,500 units) to $49.50 ($45 * 1.10). The new sales volume is expected to be 2,250 units (2,500 - 250). The total sales revenue would be $111,375 ($49.50 * 2,250 units). Assuming variable cost per unit remains the same at $31.50 ($78,750 / 2,500 units), total variable expenses would be $70,875 ($31.50 * 2,250 units). The new contribution margin would be $40,500 ($111,375 - $70,875), and after deducting the fixed expenses of $15,000, the new operating income would be $25,500 ($40,500 - $15,000). The increase in operating income is $6,750 ($25,500 - $18,750), thus making the proposal beneficial.

Claire Corporation's Contribution Margin Income Statement for March Is as Follows