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.

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