Algood Corporation manufactures numerous products, one of which is called Omicron09. The company has provided the following data about this product:?Unit sales100,000?Selling price per unit$19.00?Variable cost per unit$14.00?Traceable fixed expense$430,000Required:a. What net operating income is the company earning now on its sales of Omicron09?b. Management is considering decreasing the price of Omicron09 by 5%, from $19.00 to $18.05. The company's marketing managers estimate that this price reduction would increase unit sales by 15%, from 100,000 units to 115,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will Omicron09 earn at a price of $18.05 if this sales forecast is correct?c. Assuming that the total traceable fixed
expense does not change, how many units of Omicron09 would Algood need to sell at a price of $18.05 to earn the same net operating income that it currently earns at a price of $19.00? (Round your answer up to the nearest whole number.)
What will be an ideal response?
a.
| ? | Unit sales (a) | 100,000 |
| ? | Selling price per unit | $19.00 |
| ? | Variable cost per unit | 14.00 |
| ? | Contribution margin per unit (b) | $5.00 |
| ? | Total contribution margin (a) x (b) | $500,000 |
| ? | Traceable fixed expense | 430,000 |
| ? | Net operating income | $70,000 |
b. The profit at the price of $18.05 per unit is computed as follows:
Profit = (P ? V) × Q ? Fixed expenses
Profit = ($18.05 per unit ? $14.00 per unit) × 115,000 units ? $430,000
Profit = ($4.05 per unit) × 115,000 units ? $430,000
Profit = $465,750 ? $430,000 = $35,750
c. Profit = (P ? V) × Q ? Fixed expenses
$70,000 = ($18.05 per unit ? $14.00 per unit) × Q ? $430,000
$500,000 = ($18.05 per unit ? $14.00 per unit) × Q
$500,000 = ($4.05 per unit) × Q
Q = $500,000 ÷ $4.05 per unit = 123,457 units (rounded up)
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