Question

Our company produces a product that is currently sold for $70 per unit. We are considering processing it further into an upgraded version of the current product. If we do so, we can sell the product for $90, we will incur additional costs of $395,000, and we can sell 20,000 units

Which of the following is true?

Sell now at $70 since doing so will maximize operating income.

Process further because operating income will increase by $5,000.

Process further because operating income will increase by $7,500.

Process further because operating income will increase by $8,000.

Our company is a price setter and has the following information available for the current year:

• budgeted sales volume, 220,000 units;
• desired operating income as a percentage of total assets, 16%;
• variable costs, $25 per unit;
• fixed costs, $4,000,000; and
• total assets, $12,000,000.

What is our sales price per unit if we used the cost-plus pricing approach?

$49.60

$51.91

$54.60

$50.20

Answer 1

1)

Process further because operating income will increase by $5,000.

Additional Revenue	400,000.00
Additional Costs	395,000.00
Additional Income	5,000.00

2)

Variable cost	5,500,000.00
Fixed Costs	4,000,000.00
Total Cost	9,500,000.00
Desired Profit	1,920,000.00
Total Sales	11,420,000.00
Number of units	220,000.00
Sales Price per unit	51.91