Assume Mussa Company has the following information available:

Selling price per unit $100

Variable cost per unit $45

Fixed costs per year $420,000

Expected sales per year (units) 20,000

If fixed costs increase by $200,000, what is the expected operating income?

A) $280,000

B) $480,000

C) $680,000

D) $1,380,000

B) $480,000

Explanation:

In this question we compare the operating income

In the first case,

The operating income is

= Contribution margin - fixed cost

where,

= (Selling price per unit - Variable cost per unit) * Expected sales units per year

= ($100 - $45) * 20,000 units

= $1,100,000

And, the fixed cost is $420,000

So, the operating income is

= $1,100,000 - $420,000

= $680,000

In the second case,

The operating income is

= Contribution margin - fixed cost

where,

= (Selling price per unit - Variable cost per unit) * Expected sales units per year

= ($100 - $45) * 20,000 units

= $1,100,000

And, the fixed cost is $420,000 + $200,000 = $620,000

So, the operating income is

= $1,100,000 - $620,000

= $480,000