A small business produces a single product and reports the following data:

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:

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

C)
Contribution margin (before reduction in sales price)= $8.50 - $5.25 = $3.25
Operating income (before reduction in sales price)= (10,000 × $3.25)- $22,000 = $10,500
Contribution margin (after reduction in sales price)= $7.50 - $5.25 = $2.25
Operating income (after reduction in sales price)= (12,000 × $2.25)- $22,000 = $5000
Decrease in operating income due to reduction in selling price = $10,500 - $5000 = $5500

A Small Business Produces a Single Product and Reports the Following