A company produces 1,000 packages of chicken feed per month. The sales price is $4.00 per pack. Variable cost is $1.50 per unit, and fixed costs are $1,700 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will increase from $1.50 to $1.90 per unit, and fixed costs will increase by 20%. The company will price the new product at $5 per pack. How will this affect operating income? (Hint: Compare the increase in revenue to the increase in cost.)

It is more profitable to add the vitamin and sell the product for $5. Income will increase by $260

Explanation:

Giving the following information:

The number of units = 1,000 packages

Actual:

Selling price = $4.00 per pack.

Variable cost is $1.50 per unit

Fixed costs are $1,700 per month.

New option:

Selling price = $5

Variable cost = $1.9

Fixed costs = $2,040

We need to calculate the net income of both options, and choose the more profitable one:

Actual:

Net income = 1,000 * (4-1.5) - 1,700 = $800

New:

Net income = 1,000 * (5 - 1.9) - 2,040 = $1,060

It is more profitable to add the vitamin and sell the product for $5.