Question

Oriole Monograms sells stadium blankets that have been monogrammed with high school and university emblems. The blankets retail for $47 throughout the country to loyal alumni of over 3,700 schools. Oriole’s variable costs are 42% of sales; fixed costs are $116,000 per month.

Assume that variable costs increase to 46% of the current sales price and fixed costs increase by $13,000 per month. If Oriole were to raise its sales price 11% to cover these new costs, but the number of blankets sold were to drop by 6%, what would be the new annual operating income? (Round sales price to 2 decimal places, e.g. 52.75 and final answer to 0 decimal places, e.g. 5,275.)

Answer 1

Solution:-

The new annual operating income :-

Assume number of units = 95,000

Particulars	Amount per unit ( X)	number of units (Y)	amount ( X * Y)
Sales	$47	95,000	= $47 * 95,000 = $4,465,000
Variable costs	= 47 * 46% = $21.62	95,000	= $21.62 * 95,000 = $2,053,000
Contribution margin = (sales - variable cost )	= 47 - 21.62 = $25.38	95,000	= 95,000 * $25.38 = $2,411,100
Fixed costs			= ($116,000 * 12 ) + (13,000 * 12) = ($1,392,000) + (1,560,00) = $1,548,000
Operating income = (contribution margin - fixed cost)			=  $2,411,100 - $1,548,000 = $8,63,100

Hence, the new annual operating income = $8,63,100