Arquebus Company is owned and operated by a craftsman who makes replicas of historic firearms for museums, sportsmen and collectors. He is currently producing 40 flintlock muskets per month. Cost data are as follows: In June, the cost of the special kind of metal he uses went up considerably, and the variable cost per unit increased by $50 per unit. If volume and other factors remain constant, how will this affect the company's operating income?

Question

Arquebus Company is owned and operated by a craftsman who makes replicas of historic firearms for museums, sportsmen and collectors. He is currently producing 40 flintlock muskets per month. Cost data are as follows:  In June, the cost of the special kind of metal he uses went up considerably, and the variable cost per unit increased by $50 per unit. If volume and other factors remain constant, how will this affect the company's operating income?

Quizplus · Accepted Answer

Variable cost per unit has increased by $50, so the new variable cost per unit is $450. By producing 40 flintlock muskets per month, the company's total variable cost has increased by $50 x 40 = $2,000 per month. If volume and other factors remain constant, the company's operating income will decrease by $2,000.

Arquebus Company Is Owned and Operated by a Craftsman Who