A company produces 1000 packages of chicken feed per month.The sales price is $7 per pack.Variable cost is $1.50 per unit,and fixed costs are $1700 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 = 1000 units * $7 = $7000Variable costs = 1000 units * $1.50 = $1500Fixed costs = $1700Operating income = Revenue - Variable costs - Fixed costs = $7000 - $1500 - $1700 = $3800New operating income calculation with vitamin supplement:Revenue = 1000 units * $4.30 = $4300Variable costs = 1000 units * $2.00 = $2000Fixed costs = $1700Operating income = Revenue - Variable costs - Fixed costs = $4300 - $2000 - $1700 = $600Change in operating income = New operating income - Original operating income = $600 - $3800 = -$3200, indicating a decrease in operating income by $3200 per month, which supports choice A.Additionally, the premise of the question implies a significant change in operating income due to the adjustments in pricing and costs, making choice D incorrect. The correct interpretation of the financial impact is a decrease in operating income, not an increase or no change, which eliminates choices B and D. However, the specific mention of a $1700 decrease (choice C) is incorrect in the context of the provided data, as the calculation shows a $3200 decrease. Therefore, the correct answer is A, indicating a decrease in operating income by $3200 per month.

A Company Produces 1000 Packages of Chicken Feed Per Month