A company produces 1000 packages of dog treats per month.The sales price is $6 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 $1.80 per unit,and fixed costs will increase by 10%.At what sales price for the new product will the two alternatives (sell as is or process further)produce the same operating income? (Round your answer to the nearest cent.)

Question

Quizplus · Accepted Answer

First, we need to calculate the operating income (profit) with the current product:

Revenue = 1000 x $6 = $6,000
Total variable cost = 1000 x $1.50 = $1,500
Total fixed cost = $1,700
Operating income = Revenue - Total variable cost - Total fixed cost
Operating income = $6,000 - $1,500 - $1,700 = $2,800

Now, let's calculate the operating income with the new product:

Revenue = 1000 x $x (unknown price)
Total variable cost = 1000 x $1.80 = $1,800
Total fixed cost = $1,870 ($1,700 x 1.1)
Operating income = Revenue - Total variable cost - Total fixed cost
Operating income = $x(unknown price) x 1000 - $1,800 - $1,870

We want to find the price that makes the operating income the same as with the current product, so we set the two operating income equations equal to each other:

$x(unknown price) x 1000 - $1,800 - $1,870 = $2,800

Solving for x, we get:

$x(unknown price) = ($2,800 + $1,800 + $1,870) / 1000
$x(unknown price) = $6.47

Therefore, the new product would need to be sold for $6.47 per pack to produce the same operating income as the current product. Since this price is higher than the current price of $6, it may not be the best choice unless there is sufficient demand for a premium product with added vitamins.

A Company Produces 1000 Packages of Dog Treats Per Month