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10 December, 02:14

A company produces 1,000 packages of cat food per month. The sales price is $4.00 per pack. Variable cost is $1.60 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will increase from $1.60 to $1.80 per unit, and fixed costs will increase by 10%. The company will price the new product at $8 per pack. How will this affect operating income?

A.

Operating income will remain unchanged.

B.

Operating income will increase by $3,620 per month.

C.

Operating income will decrease by $2,020 per month.

D.

Operating income will decrease by $3,620 per month.

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  1. 10 December, 02:18
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    B. Operating income will increase by $3,620 per month.

    Explanation:

    In this question, we have to compare the operating income between current and expected proposal which is shown below:

    We know that,

    Operating income = Sales - variable cost - fixed cost

    where,

    Sales = Selling price per unit * Number of units produced per month

    = $4 * 1,000

    = $4,000

    Variable cost = Variable cost per unit * Number of units produced per month

    = $1.60 * 1,000

    = $1,600

    And, the fixed cost is $1,800

    Now put these values to the above formula

    So, the value would be equal to

    = $4,000 - $1,600 - $1,800

    = $600

    Now for expected proposal

    Operating income = Sales - variable cost - fixed cost

    where,

    Sales = Selling price per unit * Number of units produced per month

    = $8 * 1,000

    = $8,000

    Variable cost = Variable cost per unit * Number of units produced per month

    = $1.80 * 1,000

    = $1,800

    And, the fixed cost is $1,800 + $180 = $1,980

    Now put these values to the above formula

    So, the value would be equal to

    = $8,000 - $1,800 - $1,980

    = $4,220

    The difference would be

    = $4,220 - $600

    = $3,620
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