Question

Cherry Street Market reported the following information for the sales of their only product, cherries sold by the pint: Cherry Street would like to increase their selling price by 50 cents per unit, and feel that this will decrease sales volume by 10%. Should Cherry Street increase the price, and what will the effect be on net operating income?

Answer 1

Answer:

Yes; $945 increase

Explanation:

The computation of the effect on net operating income is shown below:

= $31,500 ÷ $4.50

= 7,000 pints

After 10% increase units to be sold

So,

= 7,000 × 90% = 6,300 pints

Now

Current contribution margin = $4.50 - $1.35 = $3.15

Revised contribution margin = $5.00 - $1.35 = $3.65

So,

Total Contribution $3.65 × 6,300 pints    = $22,995

Less : Fixed cost                                            $13,000  

Net Revised Income                                      $9,995

Less: Current Net Income                             $9,050

Increase / (decrease)                                    $945