McPherson Company is facing a $6 increase in the variable cost of producing one of its products for the upcoming year.As a result,the sales manager has made a proposal to increase the selling price of the product while increasing the advertising budget at the same time.The price increase will lower sales volume,but the other changes may help the company maintain its profit margins.McPherson has provided the following information regarding the current year results and the proposal made by the sales manager: Relative to the current year,the sales manager's proposal will ________.

Question

McPherson Company is facing a $6 increase in the variable cost of producing one of its products for the upcoming year.As a result,the sales manager has made a proposal to increase the selling price of the product while increasing the advertising budget at the same time.The price increase will lower sales volume,but the other changes may help the company maintain its profit margins.McPherson has provided the following information regarding the current year results and the proposal made by the sales manager:  Relative to the current year,the sales manager's proposal will ________.

Quizplus · Accepted Answer

The proposal suggests increasing the selling price and advertising budget, which will ultimately increase the contribution margin per unit. However, the price increase will result in a decrease in sales volume. From the given information, we can calculate the impact on operating income as follows:

Current year operating income = ($420,000 - $300,000) = $120,000

Under the new proposal: 
New selling price per unit = $34 
New variable cost per unit = $26

New contribution margin per unit = $8 ($34 - $26)

New sales volume required to maintain current operating income = ($120,000 / $8) = 15,000 units

Under the proposal, sales volume is expected to decrease by 5,000 units to 25,000 units.

New operating income = ($25,000 x $8) - $300,000 - $90,000 = $110,000

Therefore, the proposal will decrease operating income by $10,000 compared to the current year. Option D is the correct answer.

McPherson Company Is Facing a $6 Increase in the Variable