A small business produces a single product and reports the following data: $$\begin{array} { | l | r | l | }
\hline \text { Sales price } & \$ 8.50 & \text { per unit } \
\hline \text { Variable cost } & \$ 5.25 & \text { per unit } \
\hline \text { Fixed cost } & \$ 22,000& \text { per month } \
\hline \text { Volume } & 10,000 &\text { units per month } \
\hline
\end{array}$$ The company believes that the volume will go up to 12,000 units if the company reduces its sales price to $7.50. How would this change affect operating income?

Question

A small business produces a single product and reports the following data: $$\begin{array} { | l | r | l | } 
\hline \text { Sales price } & \$ 8.50 & \text { per unit } \
\hline \text { Variable cost } & \$ 5.25 & \text { per unit } \
\hline \text { Fixed cost } & \$ 22,000& \text { per month } \
\hline \text { Volume } & 10,000 &\text { units per month } \
\hline
\end{array}$$ The company believes that the volume will go up to 12,000 units if the company reduces its sales price to $7.50. How would this change affect operating income?

Quizplus · Accepted Answer

The decrease in sales price reduces revenue per unit, but the increase in volume partially offsets this. The net effect is a decrease in operating income by $5500.

A Small Business Produces a Single Product and Reports the Following