Tony Manufacturing produces a single product that sells for $80.Variable costs per unit equal $30.The company expects total fixed costs to be $78,000 for the next month at the projected sales level of 2,500 units.In an attempt to improve performance,management is considering a number of alternative actions.Each situation is to be evaluated separately.Suppose that management believes that a 10% reduction in the selling price will result in a 10% increase in sales.If this proposed reduction in selling price is implemented ________.
A) operating income will decrease by $9,500
B) operating income will increase by $10,000
C) operating income will decrease by $6,000
D) operating income will increase by $11,300

Question

Quizplus · Accepted Answer

The original selling price is $80, and a 10% reduction would make it $72. The original sales volume is 2,500 units, and a 10% increase would make it 2,750 units. The new contribution margin per unit is $72 - $30 = $42. Total contribution margin is 2,750 units * $42 = $115,500. Subtracting fixed costs of $78,000 gives an operating income of $37,500. The original operating income was (2,500 units * ($80 - $30)) - $78,000 = $47,000. The decrease in operating income is $47,000 - $37,500 = $9,500.

Tony Manufacturing Produces a Single Product That Sells for $80