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6 June, 13:45

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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  1. 6 June, 17:20
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    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
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