Barrier Corporation is performing a sensitivity analysis on one of its product.The product currently sells for $75 per unit, with variable cost of $46 per unit and fixed costs of $100,000.Barrier currently sells 80,000 units of this product.Barrier is considering reducing its price by 10%.If prices decrease, then it is expected that units sold will increase by 8%.Calculate the change in operating income.
A)$462,400 decrease
B)$248,500 decrease
C)$462,400 increase
D)$248,500 increase

Question

Quizplus · Accepted Answer

The original selling price is $75, and a 10% decrease results in a new price of $67.50. The original sales volume is 80,000 units, and an 8% increase results in 86,400 units. The original contribution margin per unit is $29 ($75 - $46), and the new contribution margin is $21.50 ($67.50 - $46). The original operating income is $1,220,000 (80,000 units * $29 - $100,000), and the new operating income is $757,600 (86,400 units * $21.50 - $100,000). The change in operating income is a decrease of $462,400 ($757,600 - $1,220,000).

Barrier Corporation Is Performing a Sensitivity Analysis on One of Its