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?
A.

Operating income will remain unchanged.

B.

Operating income will increase by​ $3,620 per month.

C.

Operating income will decrease by​ $2,020 per month.

D.

Operating income will decrease by​ $3,620 per month.

Answer 1

Answer:

B.  Operating income will increase by​ $3,620 per month.

Explanation:

In this question, we have to compare the operating income between current and expected proposal which is shown below:

We know that,

Operating income = Sales - variable cost - fixed cost

where,

Sales = Selling price per unit × Number of units produced per month

         = $4 × 1,000

         = $4,000

Variable cost = Variable cost per unit  × Number of units produced per month

                      = $1.60 × 1,000

                      = $1,600

And, the fixed cost is $1,800

Now put these values to the above formula

So, the value would be equal to

= $4,000 - $1,600 - $1,800

= $600

Now for expected proposal

Operating income = Sales - variable cost - fixed cost

where,

Sales = Selling price per unit × Number of units produced per month

         = $8 × 1,000

         = $8,000

Variable cost = Variable cost per unit  × Number of units produced per month

                      = $1.80 × 1,000

                      = $1,800

And, the fixed cost is $1,800 + $180 = $1,980

Now put these values to the above formula

So, the value would be equal to

= $8,000 - $1,800 - $1,980

= $4,220

The difference would be

= $4,220 - $600

= $3,620