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%. At what price for the new product will the two alternatives (sell as is or process further)produce the same operating income? Round to nearest cent.

Question

Quizplus · Accepted Answer

Without vitamin supplement:
Revenue = 1,000 x $4 = $4,000
Variable Cost = 1,000 x $1.50 = $1,500
Fixed Cost = $1,800
Operating Income = $4,000 - $1,500 - $1,800 = $700

With vitamin supplement:
Revenue = 1,000 x Price
Variable Cost = 1,000 x $1.90 = $1,900
Fixed Cost = $2,160 ($1,800 x 1.2)
Operating Income = 1,000 x Price - $1,900 - $2,160

To find the price at which both alternatives will produce the same operating income:
$700 = 1,000 x Price - $1,900 - $2,160
$700 = 1,000 x Price - $4,060
$4,760 = 1,000 x Price
Price = $4.76

Therefore, the best choice would be to add the vitamin supplement and sell the product at $4.76 to generate more operating income.

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