Pittsboro Corporation produces and sells a single product. Data for that product are:Sales price per unit $500Variable cost per unit $320Fixed expenses for the month $1,000,000Currently selling 4,000 unitsManagement is discussing increasing the price to $525 to cover an increase in fixed expenses of $80,000. Management believes they might lose 2% of sales per month. What should be the overall effect on the company's monthly operating income if this change is implemented?

Question

Business

Martin Gentry

29 March, 15:30

Pittsboro Corporation produces and sells a single product. Data for that product are:Sales price per unit $500Variable cost per unit $320Fixed expenses for the month $1,000,000Currently selling 4,000 unitsManagement is discussing increasing the price to $525 to cover an increase in fixed expenses of $80,000. Management believes they might lose 2% of sales per month. What should be the overall effect on the company's monthly operating income if this change is implemented?

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Guadalupe Erickson · Answer 1

Increase in operating income $ 3,600

Explanation:

The impact on operating income will be done using incremental analysis.

Here we consider only the impact of the proposed change on the income

This is done as follows: $

Contribution before ( 4,000 * $ (500 - 320) = 720,000

Contribution after - (98% * 4,000) * (525-320) = 803,600

Increase in contribution 83600

Increase in Fixed expenses (80,000)

Increase in operating income 3,600