Tiger Pride produces two product lines: T-shirts and Sweatshirts.Product profitability is analyzed as follows: $\begin{array}{lrr}&\text { T-SHIRTS }&\text { SWEATSHIRTS }\
\text { Production and sales volume } & 60,000 \text { units } & 35,000 \text { units } \
\text { Selling price } & \$ 16.00 & \$ 29.00 \
\text { Direct material } & \$ 2.00 & \$ 5.00 \
\text { Direct labor } & \$ 4.50 & \$ 7.20 \
\text { Manufacturing overhead } & \$ 2.00 & \$ 3.00 \
\text { Gross profit } & \$ 7.50 & \$ 13.80 \
\text { Selling and administrative } & \$ 4.00 & \$ 7.00 \
\text { Operating profit } & \$ 3.50 & \$ 6.80
\end{array}$ What is the projected decline in operating income if the direct materials costs of T-Shirts increase to $3.50 per unit and direct labor costs of Sweatshirts increase to $13.00 per unit?

Question

Quizplus · Accepted Answer

The projected decline in operating income is $293,000. This is calculated as follows:T-Shirts:Old operating profit: $3.50 per unit x 60,000 units = $210,000New operating profit: ($3.50 - $2.00) per unit x 60,000 units = $90,000Decline in operating profit: $210,000 - $90,000 = $120,000Sweatshirts:Old operating profit: $6.80 per unit x 35,000 units = $238,000New operating profit: ($6.80 - $7.20) per unit x 35,000 units = $140,000Decline in operating profit: $238,000 - $140,000 = $98,000Total decline in operating profit: $120,000 + $98,000 = $293,000

Tiger Pride Produces Two Product Lines: T-Shirts and Sweatshirts What Is the Projected Decline in Operating Income If the Is