Question

9. Tony Manufacturing produces a single product that sells for $80. Variable costs per unit equal $30. The company expects total fixed costs to be $78,000 for the next month at the projected sales level of 2,500 units. Suppose that management believes that a 10% reduction in the selling price will result in a 10% increase in sales. If this proposed reduction in selling price is implemented: A) operating income will decrease by $9,500 B) operating income will increase by $10,000 C) operating income will decrease by $6,000 D) operating income will increase by $11,300

Answer 1

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Existing Operating Income:
Revised Sales Value	2500*80	$200,000
Less: Variable Cost	2500*30	$ -75,000
Contribution Margin		$125,000
Less: Fixed Cost		$ -78,000
Operating Income		$ 47,000
Revised Operating Income:
Revised Selling Price	80-(80*10%)	$          72
Revised Sales Units	2500+(2500*10%)	2,750
Revised Sales Value	2750 Units*72	$198,000
Less: Variable Cost	2750 Units* 30	$ -82,500
Contribution Margin		$115,500
Less: Fixed Cost		$ -78,000
Operating Income		$ 37,500
Existing Operating Income		$ 47,000
New Operating Income		$ 37,500
Operating income will decrease by		$    9,500	Correct Answer is A.