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7) Tony Manufacturing produces a single product that sells for $80. Variable costs per unit equal $30. The company expects total fixed costs to be $78,000 for the next month at the projected sales level of 2,500 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 10% reduction in the selling price will result in a 10% increase in sales. If this proposed reduction in selling price is implemented ________.
A) operating income will decrease by $9,500 B) operating income will increase by $10,000 C) operating income will decrease by $6,000 D) operating income will increase by $11,300 Answer: A
Explanation: A) Reduction in revenues = $80 × 10% = $8 × 2,500 units = ($20,000) Increase in contribution = 2,500 units × 10% = 250 units × ($72 ? $30) = 10,500 Change in operating income ($9,500) Diff: 3
Objective: 4
AACSB: Application of knowledge
8) Craylon Manufacturing produces a single product that sells for $100. Variable costs per unit equal $25. The company expects total fixed costs to be $60,000 for the next month at the projected sales level of 1,000 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 $10,000 increase in the monthly advertising expense will result in a considerable increase in sales. Sales must increase by ________ to justify this additional expenditure. A) 123 units B) 134 units C) 243 units D) 143 units Answer: B
Explanation: B) $10,000/($100 ? $25) = 133.33 units to cover