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 sales volume decreases by 25%,the variable cost per unit increases by 15%,and all other factors remain the same,what will the outcome be for operating income?
A) Decrease by $31,875.
B) Decrease by $15,000.
C) Increase by $20,625.
D) Decrease by $3,125.

Question

Quizplus · Accepted Answer

The original operating income is calculated as: $(\$70 - \$50) \times 3,000 - \$25,000 = \$60,000 - \$25,000 = \$35,000$. With a 25% decrease in sales volume, the new sales volume is $3,000 \times 0.75 = 2,250$ units. The new variable cost per unit is \$50 \times 1.15 = \$57.5. The new operating income is $(\$70 - \$57.5) \times 2,250 - \$25,000 = \$28,125 - \$25,000 = \$3,125$. The decrease in operating income is \$35,000 - \$3,125 = \$31,875.

A Company Has Provided the Following Data If the Sales Volume Decreases by 25%,the Variable Cost Per