A company has provided the following data:
$\begin{array}{|l|r|}
\hline \text { Sales } & 3,000 \text { units } \
\hline \text { Sales price } & \$ 70 \text { per unit } \
\hline \text { Variable cost } & \$ 50 \text { per unit } \
\hline \text { Fixed cost } & \$ 25,000 \
\hline
\end{array}$
If the dollar contribution margin per unit is increased by 10%,total fixed cost is decreased by 20%,and all other factors remain the same,what will the outcome be for operating income?
A) Increase by $61,000.
B) Increase by $20,000.
C) Increase by $3,500.
D) Increase by $11,000.

Question

Quizplus · Accepted Answer

The original contribution margin per unit is $70 - $50 = $20. A 10% increase in this margin would make it $22 per unit. The new fixed cost after a 20% reduction is $25,000 - ($25,000 * 20%) = $20,000. The new operating income can be calculated as follows: New total contribution margin = 3,000 units * $22 = $66,000. Subtract the new fixed cost ($20,000) from this amount to get the new operating income = $66,000 - $20,000 = $46,000. The original operating income was $35,000 (Original total contribution margin = 3,000 units * $20 = $60,000 - original fixed cost of $25,000). The increase in operating income is $46,000 - $35,000 = $11,000.

A Company Has Provided the Following Data If the Dollar Contribution Margin Per Unit Is Increased by Sales