A small business produces a single product and reports the following data:
$$\begin{array} { | l | r | r | }
\hline \text { Price } & \$ 8.00 & \text { per unit } \
\hline \text { Variable cost } & \$ 5.00 & \text { per unit } \
\hline \text { Fixed cost } & \$ 21,000 & \text { per month } \
\hline \text { Volume } & 10,000 & \text { per month } \
\hline
\end{array}$$
-
If the company reduces its price to $7.50, it believes that the volume will go up to 11,000 units.
How would this change affect operating income?

Question

A small business produces a single product and reports the following data:
$$\begin{array} { | l | r | r | } 
\hline \text { Price } & \$ 8.00 & \text { per unit } \
\hline \text { Variable cost } & \$ 5.00 & \text { per unit } \
\hline \text { Fixed cost } & \$ 21,000 & \text { per month } \
\hline \text { Volume } & 10,000 & \text { per month } \
\hline
\end{array}$$
-
If the company reduces its price to $7.50, it believes that the volume will go up to 11,000 units.
How would this change affect operating income?

Quizplus · Accepted Answer

The operating income will decrease by $2,500. Initially, the income is (8-5)*10,000 - 21,000 = $9,000. After the price change, it is (7.5-5)*11,000 - 21,000 = $6,500. The difference is $9,000 - $6,500 = $2,500.

A Small Business Produces a Single Product and Reports the Following