Question

A company produces​ 1,000 packages of cat food per month. The sales price is​ $4.00 per pack. Variable cost is​ $1.60 per​ unit, and fixed costs are​ $1,800 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​ $1.80 per​ unit, and fixed costs will increase by​ 10%. The company will price the new product at​ $8 per pack. How will this affect operating​ income?

Answer 1

	Current	Proposed
Sales	(1000*4)=4000	(1000*8)=8000
Variable costs	(1000*1.6)=1600	(1000*1.8)=1800
Contribution margin	2400	6200
Fixed costs	1800	(1800*1.1)=1980
Operating income	600	4220

Hence increase in operating income=4220-600

=$3620