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 small business produces a single product and reports the following data:
A) It will increase by $5500.
B) It will increase by $10,500.
C) It will decrease by $5500.
D) It will decrease by $10,500.
C) It will decrease by $5500.
Explanation: Contribution margin (before reduction in sales price) = $8.50 - $5.25 = $3.25
Operating income (before reduction in sales price) = (10,000 × $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 × $2.25) - $22,000 = $5000
Decrease in operating income due to reduction in selling price = $10,500 - $5000 = $5500
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