Arquebus Company is owned and operated by a craftsman who makes replicas of historic firearms for museums, sportsmen and collectors. He is currently producing 40 flintlock muskets per month. Cost data are as follows:
$$\begin{array} { l l }
\text { Price } & \$ 720 \text { per unit } \
\text { Variable cost } & \$ 470 \text { per unit } \
\text { Fixed costs } & \$ 8,000 \text { per month }
\end{array}$$
In June, the cost of the special kind of metal he uses went up considerably, and the variable cost per unit increased by $50 per unit.
-The owner believes he can pass along half of the cost increase to his customers by raising the price to $745, and still maintain the same volume of sales. If so, how will this affect his operating income?

Question

Arquebus Company is owned and operated by a craftsman who makes replicas of historic firearms for museums, sportsmen and collectors. He is currently producing 40 flintlock muskets per month. Cost data are as follows:
$$\begin{array} { l l } 
\text { Price } & \$ 720 \text { per unit } \
\text { Variable cost } & \$ 470 \text { per unit } \
\text { Fixed costs } & \$ 8,000 \text { per month }
\end{array}$$
In June, the cost of the special kind of metal he uses went up considerably, and the variable cost per unit increased by $50 per unit. 
-The owner believes he can pass along half of the cost increase to his customers by raising the price to $745, and still maintain the same volume of sales. If so, how will this affect his operating income?

Quizplus · Accepted Answer

The variable cost increase is $50, so the new variable cost is $520. The price increase is $25, so the new price is $745. The contribution margin per unit decreases from $250 to $225. With 40 units, the operating income decreases by $1,000.

Arquebus Company Is Owned and Operated by a Craftsman Who