Ajax Corporation is performing a sensitivity analysis on one of its product.The product currently sells for $210 per unit, with variable cost of $90 per unit and fixed costs of $400,000.Ajax currently sells 12,000 units of this product.Ajax is considering raising its price by 15%.If prices increase, then it is expected that units sold will decrease by 10%.Calculate the change in operating income.
A)$196,200 decrease
B)$248,500 decrease
C)$196,200 increase
D)$248,500 increase

Question

Quizplus · Accepted Answer

The new price per unit is $241.50 (15% increase from $210). The new sales volume is 10,800 units (10% decrease from 12,000). The new revenue is $2,608,200 (10,800 units * $241.50). The variable cost is $972,000 (10,800 units * $90). The contribution margin is $1,636,200 ($2,608,200 - $972,000). Subtracting fixed costs of $400,000, the new operating income is $1,236,200. The original operating income was $1,040,000 (12,000 units * ($210 - $90) - $400,000). The change in operating income is $196,200 increase ($1,236,200 - $1,040,000).

Ajax Corporation Is Performing a Sensitivity Analysis on One of Its