A small business produces a single product and reports the following data: $\begin{array}{lc}
\text { Price } & \$ 8.00 \text { per unit } \
\text { Variable cost } & \$ 5.00 \text { per unit } \
\text { Fixed cost } & \$ 21,000 \text { per month } \
\text { Volume } & 10,000 \text { per month }
\end{array}$ If the company reduces its price to $7.50, it believes that the volume will go up to 11,000 units.
How would this change affect operating income?

Question

Quizplus · Accepted Answer

The operating income will decrease by $2,500. The initial operating income is $(8 - 5) \times 10,000 - 21,000 = 9,000$. After the price reduction, the operating income is $(7.5 - 5) \times 11,000 - 21,000 = 6,500$. The change is $6,500 - 9,000 = -2,500$.

A Small Business Produces a Single Product and Reports the Following