Question

9. Tony Manufacturing produces a single product that sells for $80. Variable costs per unit equal $30. The company expects total fixed costs to be $78,000 for the next month at the projected sales level of 2,500 units. Suppose that management believes that a 10% reduction in the selling price will result in a 10% increase in sales. If this proposed reduction in selling price is implemented: A) operating income will decrease by $9,500 B) operating income will increase by $10,000 C) operating income will decrease by $6,000 D) operating income will increase by $11,300

Answer 1

Ans.	Present Income Statement
	Income Statement
	Particulars			Amt. ($)
	Sales (2,500 unit @80)			200,000
	Less: Variable expense			75,000
	Contribution margin			125,000
	Less: Fixed expenses			78,000
	Operating Income			$ 47,000

Proposed Income Statement with reduced selling price.
Income Statement
Particulars			Amt. ($)
Sales (W.N.1&2) (2,750 unit @72)			198,000
Less: Variable expense			82,500
Contribution margin			115,500
Less: Fixed expenses			78,000
Operating Income			37,500

Working Notes:
1) Sales =	2500 + (2500 x 10*)
=	2500 + 250
=	2750 units
2) Price =	$ 80 - ($ 80 x 10%)
=	$80 - $8
=	$72

Answer is : A) Operating Income will decreased by $ 9,500 ($47,000 - $37,500)