Question

Perry Corporation produces and sells a single product. Data for that product​ are: Sales price per unit $ 275 Variable cost per unit $ 130 Fixed expenses for the month $ 690 comma 000 Currently selling 10 comma 000 units Upper management is considering using a biodegradable packaging which costs $ 7 more per unit but it produces less waste in the long run. Management plans to increase advertising by $ 7 comma 000 in the first month to advertise this new feature to their packaging. They believe that environmentally friendly people will switch to their product resulting in an increase in sales of 4 comma 000 units per month. What should be the overall effect on the​ company's monthly operating income in the first month if this change is​ implemented?

Answer 1

Answer:

new contribution margin per unit = $275 - $137 = $138

total contribution margin = (10,000 + 4,000) x $138 = $1,932,000

total fixed costs = $690,000 + $7,000 = $697,000

operating income = $1,235,000

old operating income = $1,450,000 - $690,000 = $760,000

operating income will increase by $475,000 or 62.5%