Taizhong Semiconductor Company mass produces several common computer chips. Type A sells for $1.20 per unit. Variable cost was $0.95 per unit and the fixed costs were $32,000 per month. Taizhong currently sells 140,000 units per month. Because of volatility in the precious metals market, the variable cost per unit has just gone up by $0.05, but the company does not believe it can pass the extra cost on to the customer. To offset higher variable costs, the production manager has developed a plan which will reduce fixed costs by 20%. How will these combined changes affect net operating income?

Question

Quizplus · Accepted Answer

B) Calculations:
$1.20 - $0.95 = $0.25
(140,000 × $0.25) - $32,000 = $3,000
(140,000 × $0.20) - $25,600 = $2,400
$3,000 - $2,400 = $600
$600/$3,000 = 20%

Taizhong Semiconductor Company Mass Produces Several Common Computer Chips