Alvarez Company is facing an $8 increase in the variable costs of producing one of its products for the upcoming year.As a result,the sales manager has made a proposal to increase the sales price of the product while increasing the advertising budget at the same time.The sales price increase will lower sales volume,but the other changes may help the company maintain its profit margin.Alvarez has provided the following information regarding the current year results and the proposal made by the sales manager: $$\begin{array} { | l | r | r | }
\hline & \text { Current Year } & \text { Proposal } \
\hline \text { Unit sales } & 27,000 & 18,000 \
\hline \text { Sales price per unit } & \$ 48 & \$ 54 \
\hline \text { Variable cost per unit } & \$ 32 & \$ 40 \
\hline \text { Fixed cost } & \$ 80,000 & \$ 96,000 \
\hline
\end{array}$$ Relative to the current year,the sales manager's proposal will ________.
A) decrease operating income by $324,000
B) increase contribution margin by $196,000
C) decrease the unit breakeven point
D) decrease operating income by $196,000

Question

Alvarez Company is facing an $8 increase in the variable costs of producing one of its products for the upcoming year.As a result,the sales manager has made a proposal to increase the sales price of the product while increasing the advertising budget at the same time.The sales price increase will lower sales volume,but the other changes may help the company maintain its profit margin.Alvarez has provided the following information regarding the current year results and the proposal made by the sales manager: $$\begin{array} { | l | r | r | } 
\hline & \text { Current Year } & \text { Proposal } \
\hline \text { Unit sales } & 27,000 & 18,000 \
\hline \text { Sales price per unit } & \$ 48 & \$ 54 \
\hline \text { Variable cost per unit } & \$ 32 & \$ 40 \
\hline \text { Fixed cost } & \$ 80,000 & \$ 96,000 \
\hline
\end{array}$$ Relative to the current year,the sales manager's proposal will ________.
A) decrease operating income by $324,000
B) increase contribution margin by $196,000
C) decrease the unit breakeven point
D) decrease operating income by $196,000

Quizplus · Accepted Answer

The operating income for the current year is calculated as follows: $$ \text{Operating Income} = (\text{Sales Price per Unit} - \text{Variable Cost per Unit}) \times \text{Unit Sales} - \text{Fixed Cost} $$ For the current year: $$ (\$48 - \$32) \times 27,000 - \$80,000 = \$432,000 - \$80,000 = \$352,000 $$ For the proposed year: $$ (\$54 - \$40) \times 18,000 - \$96,000 = \$252,000 - \$96,000 = \$156,000 $$ The decrease in operating income is: $$ \$352,000 - \$156,000 = \$196,000 $$ Therefore, the proposal will decrease operating income by $196,000.

Alvarez Company Is Facing an $8 Increase in the Variable