If sales volume were to decrease 10%, from 4,000 units per month to 3,600 units per month, operating income would:

Question

Quizplus · Accepted Answer

To calculate the impact of a 10% decrease in sales volume on operating income, we need to first determine the current operating income. Without that information, we cannot determine if the operating income will increase, decrease or remain the same.

Let's assume that the current operating income for 4,000 units per month is $240,000. Using this information, we can calculate the operating income for 3,600 units per month as follows:

Operating Income = (Sales Volume x Contribution Margin) - Fixed Costs

Current Operating Income = (4,000 x Contribution Margin) - Fixed Costs = $240,000

To calculate the new operating income for sales volume of 3,600 units, we need to first determine the contribution margin per unit. Let's assume the contribution margin per unit is $60.

New Operating Income = (3,600 x $60) - Fixed Costs

= $216,000 - Fixed Costs

If we assume that the fixed costs remain the same, the new operating income would be:

New Operating Income = $216,000 - $240,000 = -$24,000

As we can see, the operating income would decrease by $24,000 or Choice C).

If Sales Volume Were to Decrease 10%, from 4,000 Units