A company produces 1,000 packages of chicken feed per month.The sales price is $6 per pack.Variable cost is $1.50 per unit,and fixed costs are $1,700 per month.Management is considering adding a vitamin supplement to improve the value of the product.The variable cost will increase from $1.50 to $2.00 per unit,but there will be no change in fixed costs.The company will price the new product at $4.30 to compete with other products.How will this affect operating income?

Question

Quizplus · Accepted Answer

CExplanation:Original operating income calculation:Revenue = 1,000 packs * $6/pack = $6,000Variable costs = 1,000 packs * $1.50/pack = $1,500Fixed costs = $1,700Operating income = Revenue - Variable costs - Fixed costs = $6,000 - $1,500 - $1,700 = $2,800New operating income calculation with vitamin supplement:Revenue = 1,000 packs * $4.30/pack = $4,300Variable costs = 1,000 packs * $2.00/pack = $2,000Fixed costs = $1,700Operating income = Revenue - Variable costs - Fixed costs = $4,300 - $2,000 - $1,700 = $600Change in operating income = New operating income - Original operating income = $600 - $2,800 = -$2,200Therefore, operating income will decrease by $2,200 per month, making choice A correct. Choice C is incorrect because the calculation provided does not lead to a $1,700 decrease in operating income based on the given scenario.

A Company Produces 1,000 Packages of Chicken Feed Per Month