Frazer Corp sells several products.Information of average revenue and costs is as follows: $\begin{array}{lr}
\text { Selling price per unit } & \$ 28.50 \
\text { Variable costs per unit: } & \
\text { Direct material } & \$ 5.50 \
\text { Direct manufacturing labor } & \$ 1.15 \
\text { Manufacturing overhead } & \$ 0.85 \
\text { Selling costs } & \$ 2.50 \
\text { Annual fixed costs } & \$ 125,000
\end{array}$
If the company decides to lower its selling price by 12.25%,the operating income is reduced by ________.
A) $52,500
B) $50,500
C) $55,500
D) $29,500

Question

Frazer Corp sells several products.Information of average revenue and costs is as follows: $\begin{array}{lr}
\text { Selling price per unit } & \$ 28.50 \
\text { Variable costs per unit: } & \
\text { Direct material } & \$ 5.50 \
\text { Direct manufacturing labor } & \$ 1.15 \
\text { Manufacturing overhead } & \$ 0.85 \
\text { Selling costs } & \$ 2.50 \
\text { Annual fixed costs } & \$ 125,000
\end{array}$ 
If the company decides to lower its selling price by 12.25%,the operating income is reduced by ________.
A) $52,500
B) $50,500
C) $55,500
D) $29,500

Quizplus · Accepted Answer

The new selling price is $28.50 - (12.25% of $28.50) = $25.00. The contribution margin per unit is now $25.00 - ($5.50 + $1.15 + $0.85 + $2.50) = $15.00. The reduction in operating income is calculated by the decrease in contribution margin per unit multiplied by the number of units sold. Assuming the same number of units sold, the reduction in operating income is $52,500.

Frazer Corp Sells Several Products If the Company Decides to Lower Its Selling Price by Is