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19 February, 13:14

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.)

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  1. 19 February, 16:48
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    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.
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