A company produces 1000 packages of cat food per month.The sales price is $3.90 per pack.Variable cost is $1.60 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 $1.60 to $1.70 per unit,and fixed costs will increase by 20%.The company will price the new product at $7 per pack.How will this affect operating income?

Question

Quizplus · Accepted Answer

The original operating income is calculated as: (Sales price - Variable cost) * Quantity - Fixed costs = ($3.90 - $1.60) * 1000 - $1700 = $2300. With the new product, the operating income becomes: (New sales price - New variable cost) * Quantity - New fixed costs = ($7 - $1.70) * 1000 - ($1700 * 1.20) = $5300. The increase in operating income is $5300 - $2300 = $3000 per month.

A Company Produces 1000 Packages of Cat Food Per Month