Question

Loren Company's single product has a selling price of $15 per unit. Last year the company reported total variable expenses of $180,000, fixed expenses of $90,000, and a net operating income of $30,000. A study by the sales manager discloses that a 15% increase in the selling price would reduce unit sales by 10%. If her proposal is adopted, net operating income would:

Answer 1

Answer:

If the company applies the changes, income will increase by $28,500.

Explanation:

First, we need to calculate the current number of units sold:

Sales (dollars)= net income + fixed costs + total variable cost

Sales (dollars)= 30,000 + 90,000 + 180,000

Sales (dollars)= $300,000

Number of units= 300,000 / 15= 20,000

Now, the selling price increases by 15%, and the number of units decreased by 10%:

Unitary variable cost= 180,000/20,000= $9

Selling price= 15*1.15= $17.25

Number of units sold= 20,000*0.9= 18,000

Net operating income= 18,000*(17.25 - 9) - 90,000

Net operating income= $58,500

If the company applies the changes, income will increase by $28,500.