Pascal Corporation manufactures numerous products, one of which is called Gamma66. The company has provided the following data about this product: Management is considering decreasing the price of Gamma66 by 4%, from $51.00 to $48.96. The company's marketing managers estimate that this price reduction would increase unit sales by 10%, from 100,000 units to 110,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will product Gamma66 earn at a price of $48.96 if this sales forecast is correct?
A) $(74,000)
B) $1,645,600
C) $75,600
D) $1,496,000

Question

Pascal Corporation manufactures numerous products, one of which is called Gamma66. The company has provided the following data about this product:  Management is considering decreasing the price of Gamma66 by 4%, from $51.00 to $48.96. The company's marketing managers estimate that this price reduction would increase unit sales by 10%, from 100,000 units to 110,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will product Gamma66 earn at a price of $48.96 if this sales forecast is correct?
A) $(74,000) 
B) $1,645,600 
C) $75,600 
D) $1,496,000

Quizplus · Accepted Answer

First, we need to determine the contribution margin per unit of Gamma66.

Contribution margin per unit = selling price per unit - variable cost per unit

From the given data, we know that the current selling price is $51.00, and the variable cost per unit is $30.00. Therefore:

Contribution margin per unit = $51.00 - $30.00 = $21.00

Next, we need to calculate the total contribution margin for Gamma66 at the current sales level:

Total contribution margin = contribution margin per unit x number of units sold

Total contribution margin = $21.00 x 100,000 = $2,100,000

If the price decreases by 4% to $48.96, the new contribution margin per unit will be:

New contribution margin per unit = $48.96 - $30.00 = $18.96

At the new sales level of 110,000 units, the total contribution margin will be:

Total contribution margin = $18.96 x 110,000 = $2,085,600

However, we also need to account for the fixed expenses which are traceable to Gamma66. From the given data, we know that the traceable fixed expenses do not change with the level of sales or the selling price.

Let's assume that the traceable fixed expenses for Gamma66 are $2,010,000.

Net operating income = total contribution margin - traceable fixed expenses

Net operating income at the current sales level:

Net operating income = $2,100,000 - $2,010,000 = $90,000

Net operating income at the new sales level:

Net operating income = $2,085,600 - $2,010,000 = $75,600

Therefore, the net operating income for product Gamma66 at a price of $48.96, if the sales forecast is correct, will be $75,600. The answer is choice C.

Pascal Corporation Manufactures Numerous Products, One of Which Is Called