A company produces 1000 packs of chicken feed per month.Sales price is $4.00 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 go up from $1.50 to $1.70 per unit,and fixed costs will go up by 20%.The company will price the new product at $5 per pack.How will this affect operating profit?

Question

Quizplus · Accepted Answer

The original operating profit is calculated as (Sales price - Variable cost) * Quantity - Fixed costs = ($4.00 - $1.50) * 1000 - $1700 = $1500. With the new product, the operating profit is ($5.00 - $1.70) * 1000 - ($1700 * 1.2) = $1960. The increase in operating profit is $1960 - $1500 = $460.

A Company Produces 1000 Packs of Chicken Feed Per Month