A small business produces a single product and reports the following data
Sales price $8.50 per unit
Variable cost $5.25 per unit
Fixed cost $22,000 per month
Volume 10,000 units per month
The company believes that the volume will go up to 12,000 units if the company reduces its sales price to $7.50. How would this change affect operating income?
A) It will increase by $5,500.
B) It will increase by $10,500.
C) It will decrease by $5,500.
D) It will decrease by $10,500.
C .C) Contribution margin (before reduction in sales price) = $8.50 - $5.25 = $3.25
Operating income (before reduction in sales price) = (10,000 x $3.25 ) - $22,000 = $10,500
Contribution margin (after reduction in sales price) = $7.50 - $5.25 = $2.25
Operating income (after reduction in sales price) = (12,000 x $2.25 ) - $22,000 = $5,000
Decrease in operating income due to reduction in selling price = $10,500 - $5,000 = $5,500
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