Question

Charriott sells a single product at $200 per unit. The firm's most recent income statement revealed unit sales of 2,000, variable costs per unit of $50, and fixed costs of $120,000. Management believes that a 20% drop in selling price will boost sales by 20%. If this reduction in selling price is implemented, Multiple Choice Operating income will increase by $36,000. Operating income will decrease by $80,000. Operating income will decrease by $36,000. Operating income will increase by $44,000. Operating income will decrease by $124,000.

Answer 1

Answer:

Income will decrease by $36,000.

Explanation:

Giving the following information:

New selling price= 200*0.8= $160

New sales in units= 2,000*1.2= 2,400 units

Variable cost per unit= $50

Fixed costs= $120,000

First, we determine the current operating income:

Current income= 2,000*(200 - 50) - 120,000

Current income= $180,000

Now, the new income:

New operating income= 2,400*(160 - 50) - 120,000

New operating income= $144,000

Income will decrease by $36,000.