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%.
