Question

Oriole Monograms sells stadium blankets that have been monogrammed with high school and university emblems. The blankets retail for $50 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 10% 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:

New selling price = $50 + 10% = $55

New variable cost = $50 X 46% = $23

New fixed cost = ($116,000 + $13,000) X 12 = $1,548,000

Number of units sold = (3,700 * 12) - 6% = 41,736

(Even though in the question it has been given that it is sold to over 3,700 schools, we have assumed the number of schools/customers to be 3,700 per month since without this it is not possible to solve the question)

New annual operating income =

[(New selling price - New variable cost) * Number of units sold] - New fixed cost

= [($55 - $23) * 41,736] - $1,548,000

= [$ 32 * 41,736] - $1,548,000

= $1,335,552 - $1,548,000

= (-)$212,448

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