Question

Starforce Avionics makes aircraft instrumentation. Its basic navigation radio requires $ 80$80 in variable costs and...

Starforce Avionics makes aircraft instrumentation. Its basic navigation radio requires

$ 80$80

in variable costs and

$ 5 comma 000$5,000

per month in fixed costs. Further processing the​ radio, to enhance its​ functionality, will require an additional

$ 28$28

per unit of variable costs but no change to the fixed costs. The marketing manager believes that the company would be able to increase the sales price from

$ 290$290

to

$ 310$310.

If Starforce decides to further process the​ product, operating income would​ ________.

A.decrease by

$ 8$8

per unit

B.

remain the same

C.increase by

$ 108$108

per unit

D.increase by

$ 28$28

per unit

Homework Answers

Answer #1
Option (A) is correct
Operating income before further processing :
Sales $    290
Less : Variable costs $     -80
Operating income (A) $    210
Operating income after further processing :
Sales $    310
Less : Variable costs $   -108
Operating income (B) $    202
Operating income would decrease by (A-B) $        8 Per unit
Note : Fixed costs are irrelevant for decision making
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