A small business produces a single product and reports the following data:
$$\begin{array} { | l | r | r | }
\hline \text { Price } & \$ 8.00 & \text { per unit } \
\hline \text { Variable cost } & \$ 5.00 & \text { per unit } \
\hline \text { Fixed cost } & \$ 21,000 & \text { per month } \
\hline \text { Volume } & 10,000 & \text { per month } \
\hline
\end{array}$$
-
The company's variable cost goes up by $0.75 per unit, so they raise the price by the same amount.
Assume other factors remain the same. How would this change affect operating income?

Question

A small business produces a single product and reports the following data:
$$\begin{array} { | l | r | r | } 
\hline \text { Price } & \$ 8.00 & \text { per unit } \
\hline \text { Variable cost } & \$ 5.00 & \text { per unit } \
\hline \text { Fixed cost } & \$ 21,000 & \text { per month } \
\hline \text { Volume } & 10,000 & \text { per month } \
\hline
\end{array}$$
-
The company's variable cost goes up by $0.75 per unit, so they raise the price by the same amount.
Assume other factors remain the same. How would this change affect operating income?

Quizplus · Accepted Answer

The increase in price by $0.75 per unit offsets the increase in variable cost by $0.75 per unit, leaving the contribution margin per unit unchanged. Therefore, the operating income remains the same.

A Small Business Produces a Single Product and Reports the Following