Carlo Company makes bulk quantities of cleaning fluids. They currently sell 1,000 containers a month at a price of $22 per unit. If they added a newer scent, they could charge $22.75 per unit for the improved product. It would cost them a total of $700 per month to make that alteration. What would be the effect on operating income?

Question

Quizplus · Accepted Answer

The additional cost of $700 per month to make the alteration would reduce the operating income by that amount. 
However, the increase in price from $22 to $22.75 would generate an additional $0.75 of profit per unit sold. 
Therefore, by selling 1,000 units per month with the new scent, the company would have an additional profit of $750 ($0.75 x 1,000) per month. 
This would more than offset the added cost of $700, resulting in an increase in operating income of $50 per month.

Carlo Company Makes Bulk Quantities of Cleaning Fluids