Answer the following questions using the information below:
Martha Manufacturing produces a single product that sells for $80. Variable costs per unit equal $32. The company expects total fixed costs to be $72,000 for the next month at the projected sales level of 2,000 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately.
-Suppose that management believes that a 10% reduction in the selling price will result in a 10% increase in sales. If this proposed reduction in selling price is implemented:
A)operating income will decrease by $8,000
B)operating income will increase by $8,000
C)operating income will decrease by $16,000
D)operating income will increase by $16,000

Question

Quizplus · Accepted Answer

The original selling price is $80, and a 10% reduction would make it $72. The original sales volume is 2,000 units, and a 10% increase would make it 2,200 units. The new contribution margin per unit is $72 - $32 = $40. The new total contribution margin is 2,200 units * $40 = $88,000. Subtracting fixed costs of $72,000, the new operating income is $16,000. The original operating income was $80,000 - $64,000 - $72,000 = $16,000. Therefore, the operating income decreases by $8,000.

Answer the Following Questions Using the Information Below