A company produces 1,000 packages of chicken feed per month.The sales price is $4.00 per pack.Variable cost is $1.60 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 $1.60 to $1.70 per unit,and fixed costs will increase by 20%.The company will price the new product at $6 per pack.How will this affect operating income?

Question

Quizplus · Accepted Answer

Current operating income calculation: 
Revenue = 1,000 x $4.00 = $4,000 
Variable costs = 1,000 x $1.60 = $1,600 
Fixed costs = $1,700 
Operating income = $4,000 - $1,600 - $1,700 = $700

New operating income calculation: 
Revenue = 1,000 x $6.00 = $6,000 
Variable costs = 1,000 x $1.70 = $1,700 
Fixed costs = $1,700 x 1.20 = $2,040 
Operating income = $6,000 - $1,700 - $2,040 = $2,260

The increase in selling price will result in increased revenue. Even though there is an increase in variable costs and fixed costs, the increase in operating income is greater than the increase in costs. Therefore, operating income will increase by $1,560 per month.

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