Question

Tony Manufacturing produces a single product that sells for​ $80. Variable costs per unit equal​ $50. The company expects total fixed costs to be​ $82,000 for the next month at the projected sales level of​ 2,800 units. In an attempt to improve​ performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. Suppose that management believes that a​ 14% reduction in the selling price will result in a​ 14% increase in sales. If this proposed reduction in selling price is implemented​ ________. A. operating income will decrease by​ $23,990 B. operating income will decrease by​ $31,360 C. operating income will increase by​ $7,370 D. operating income will increase by​ $23,990

Answer 1

Answer:

The correct option is (A)

Explanation:

Given:

Projected sales for next month = $2,800 units

Selling price = $80

Total sales in dollars = 2800×80 = $224,000

Total variable costs = 2800×50 = $140,000

Fixed cost = $82,000

Operating income = Total sales - total variable cost - fixed cost

                              = 224,000 - 140,000 - 82,000

                              = $2,000

If selling price is reduced by 14% that is $68.8 which is (80×0.86) in anticipation of increase in sales by 14% that is 3192 units that is (2800×1.14) , then change in operating income is calculated below:

Total sales in dollars = 3192×68.8 = $219,610 (rounded)

Total variable costs = 3192×50 = $159,600

Fixed cost = $82,000

Operating income = Total sales - total variable cost - fixed cost

                              = 219,610 - 159,600 - 82,000

                              = -$21990.4

It can be observed that operating income reduced by $23,990 that is (2000 - (-21,990)) if selling price is decreased by 14%.