McPherson Company is facing a $2 increase in the variable costs of producing one of its products for the upcoming year
As a result, the sales manager has made a proposal to increase the sales price of the product while increasing the advertising budget at the same time. The sales price increase will lower sales volume, but the other changes may help the company maintain its profit margin. McPherson has provided the following information regarding the current year results and the proposal made by the sales manager:
Current Year Proposal
Unit sales 28,000 20,000
Sales price per unit $48 $56
Variable cost per unit $34 $36
Fixed cost $76,000 $98,000
Relative to the current year, the sales manager's proposal will ________.
A) decrease operating income by $8,000
B) increase contribution margin by $14,000
C) decrease the unit breakeven point
D) decrease operating income by $14,000
D .D)
Evaluation of current year data:
Sales price per unit $48
Less: Variable cost per unit (34 )
Contribution margin per unit $14
Number of units sold 28,000
Total contribution margin ($14 x 28,000 ) $392,000
Less: Fixed costs (76,000 )
Operating income $316,000
Evaluation of proposal made by the sales manager:
Sales price per unit $56
Less: Variable cost per unit (36 )
Contribution margin per unit $20
Number of units sold 20,000
Total contribution margin ($20 x 20,000 ) $400,000
Less: Fixed cost (98,000 )
Operating income $302,000
Increase or (decrease) in operating income = $302,000 - $316,000 = (14,000 )
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