Question

7) ) A small business produces a single product and reports the following data: Price Variable cost Fixed cost $8.00 per unit 15.00 per unit $21,000 per month Volume0,000er month The company believes that the volume will go up to 11,000 units if the company reduces its price to 7.50.How would this change affect operating income? B) It will go down by $2,500. D) It will go up by $9,000 A) It will go down by $9,000 C) It will go up by $2,500

Answer 1

Operating income = Total Contribution margin - Fixed cost

Present operating income

= [(8-5)*10,000] - 21,000

= 9,000

Expected operating income

= [(7.50-5)*11,000] - 21,000

= 6,500

So the operating income went down by 2,500 (6,500-9,000)

Option B