A company produces 1,000 packs of chicken feed per month. Sales price is $4 per pack. Variable cost is $1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, and fixed costs will go up by 20%. The company will price the new product at $5 per pack. How will this affect operating income?

Question

Quizplus · Accepted Answer

The new operating income is calculated by subtracting the new total costs from the new total revenue. The new revenue is $5,000 (1,000 packs x $5), the new variable cost is $1,900 (1,000 packs x $1.90), and the new fixed cost is $2,160 ($1,800 + 20% of $1,800). The new operating income is $5,000 - $1,900 - $2,160 = $940. The old operating income was $1,700 ($4,000 - $1,500 - $1,800). The increase in operating income is $940 - $700 = $240.

A Company Produces 1,000 Packs of Chicken Feed Per Month