A small business produces a single product and reports the following data: $$\begin{array} { | l | r | r|}
\hline \text { Sales price } & \$ 8.50& \text { per unit } \
\hline \text { Variable cost } & \$ 5.25& \text { per unit } \
\hline \text { Fixed cost } & \$ 22,000& \text { per month } \
\hline & \
\text { Volume } & 10,000& \text { monts per } \
\hline
\end{array}$$ 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: $$\begin{array} { | l | r | r|} 
\hline \text { Sales price } & \$ 8.50& \text { per unit } \
\hline \text { Variable cost } & \$ 5.25& \text { per unit } \
\hline \text { Fixed cost } & \$ 22,000& \text { per month } \
\hline & \
\text { Volume } & 10,000& \text { monts per } \
\hline
\end{array}$$ 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 the contribution margin per unit from $3.25 to $2.25. At 12,000 units, the new contribution margin is $27,000, compared to the original $32,500 at 10,000 units, resulting in a decrease of $5,500 in operating income.

A Small Business Produces a Single Product and Reports the Following