Perry Corporation produces and sells a single product. Data for that product are: Upper management is considering using a biodegradable packaging which costs $5 more per unit but it produces less waste in the long run. Management plans to increase advertising by $10,000 in the first month to advertise this new feature to their packaging. They believe that environmentally friendly people will switch to their product resulting in an increase in sales of 2,000 units per month.
What should be the overall effect on the company's monthly operating income in the first month if this change is implemented?

Question

Perry Corporation produces and sells a single product. Data for that product are:  Upper management is considering using a biodegradable packaging which costs $5 more per unit but it produces less waste in the long run. Management plans to increase advertising by $10,000 in the first month to advertise this new feature to their packaging. They believe that environmentally friendly people will switch to their product resulting in an increase in sales of 2,000 units per month.
What should be the overall effect on the company's monthly operating income in the first month if this change is implemented?

Quizplus · Accepted Answer

The increase in operating income can be calculated as follows:

Increase in sales revenue = 2,000 units x $60 per unit = $120,000
Increase in variable costs = 2,000 units x $15 per unit = $30,000
Increase in fixed costs = $10,000
Total increase in operating income = $120,000 - $30,000 - $10,000 = $80,000

Adding this increase in operating income to the original operating income of $20,000, we get a new operating income of $100,000. Therefore, the overall effect on the company's monthly operating income in the first month if this change is implemented is an increase of $80,000.

Perry Corporation Produces and Sells a Single Product