Tony Manufacturing produces a single product that sells for $80. Variable costs per unit equal $50. The company expects total fixed costs to be $82,000 for the next month at the projected sales level of 2,800 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. Suppose that management believes that a 14% reduction in the selling price will result in a 14% increase in sales. If this proposed reduction in selling price is implemented ________. A. operating income will decrease by $23,990 B. operating income will decrease by $31,360 C. operating income will increase by $7,370 D. operating income will increase by $23,990

If selling price is reduced by 14% that is $68.8 which is (80×0.86) in anticipation of increase in sales by 14% that is 3192 units that is (2800×1.14) , then change in operating income is calculated below:

Total sales in dollars = 3192×68.8 = $219,610 (rounded)

Total variable costs = 3192×50 = $159,600

Fixed cost = $82,000

Operating income = Total sales - total variable cost - fixed cost

= 219,610 - 159,600 - 82,000

= -$21990.4

It can be observed that operating income reduced by $23,990 that is (2000 - (-21,990)) if selling price is decreased by 14%.

marvineetesh3 marvineetesh3 · Answer 2 · 2022-03-02T06:53:11+01:00

The toy manufacturing company detected that operating income cut down by $23,990 that is [tex](2000 - (-21,990))[/tex] if selling price is diminished by 14%.

What is operating income?

Operating income is the total amount of profit that a company may leave by deducting all the direct and indirect operational cost from sales revenue.

Computation of operating income:

According to the given condition,

Selling price = $80 for a single product,

Variable cost = $50 for a single product,

Projected sales for upcoming month = $2,800 units.

Then the total sales of the next year would be:

[tex]\text{Total Sales}= \text{Total Units sold}\times\text{Price Per unit}\\\\2,800\text{Units}\times\$80\\\\\\\text{Total Sales} = \$2,24,000[/tex]

The variable cost of the next year would be:

[tex]\text{Total variable costs} = \text{Total Units sold}\times\text{Variable Cost Per Unit}\\\\\text{Total variable costs} = 2,800\times\$50\\\\\text{Total variable costs}= \$140,000[/tex]

Fixed cost = $82,000.

Then operating Income would be:

[tex]\text{Operating Income} = \rm{Total Sales - Total Variable Cost - Fixed Cost}\\\\\text{Operating Income} = \$2,24,000 - \$1,40,000 - \$82,000\\\\ \text{Operating Income} = \$2,000[/tex]

Now in case if the selling price is cut down by 14% that is $68.8[tex](\$80\times0.86)[/tex] in expectancy of gain in sales by 14% that is 3,192 units[tex](2,800\times1.14)[/tex].

Then the change in operating income would be:

Total sales:

[tex]=3,192\times\$68.8 =\$2,19,610(\text{Approx)}[/tex]

Total variable costs:

[tex]= 3192\times\$50 = \$1,59,600[/tex]

Fixed cost = $82,000

Then, the change in operating income would be:

[tex]\text{Operating Income} = \text{Total Sales} - \text{Total Variable Cost} - \text{Fixed Cost}\\\\\text{Operating Income} = \$2,19,610 - \$1,59,600 - \$82,000\\\\\text{Operating Income} =-\$21,990.4[/tex]

Therefore, option A is correct.

Learn more about the operating income, refer to:

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