Chruch Corporation manufactures numerous products, one of which is called Tau-42. The company has provided the following data about this product: Management is considering decreasing the price of Tau-42 by 8%, from $67.00 to $61.64. The company's marketing managers estimate that this price reduction would increase unit sales by 10%, from 52,000 units to 57,200 units. Assuming that the total traceable fixed expense does not change, what net operating income (loss) will product Tau-42 earn at a price of $61.64 if this sales forecast is correct?

A) $(316,992)
B) $657,280
C) $(65,728)
D) $723,008

Question

Chruch Corporation manufactures numerous products, one of which is called Tau-42. The company has provided the following data about this product:

Management is considering decreasing the price of Tau-42 by 8%, from $67.00 to $61.64. The company's marketing managers estimate that this price reduction would increase unit sales by 10%, from 52,000 units to 57,200 units. Assuming that the total traceable fixed expense does not change, what net operating income (loss) will product Tau-42 earn at a price of $61.64 if this sales forecast is correct?

A) $(316,992)
B) $657,280
C) $(65,728)
D) $723,008

Zachary Freeman · Accepted Answer

Final Answer : A, Explanation :  First, we need to calculate the current contribution margin per unit of Tau-42:$67.00 - ($28.00 + $13.50 + $2.30) = $23.20Using this contribution margin per unit, we can calculate the current net operating income for Tau-42:$23.20 x 52,000 - $495,000 = $(83,600)Now, let's calculate the new contribution margin per unit after the price reduction:$61.64 - ($28.00 + $13.50 + $2.30) = $17.84With a 10% increase in unit sales, the new total unit sales will be:52,000 x 1.1 = 57,200Using these numbers, we can calculate the new net operating income for Tau-42:$17.84 x 57,200 - $495,000 = $316,992However, the question asks us to assume that total traceable fixed expenses do not change. Therefore, the net operating income at the new price of $61.64 will be:$(83,600) + $316,992 = $233,392But wait, we have to remember that the question asked for the net operating income (loss), which means that we need to include the negative sign in front of the current net operating income.So, the final answer is:$(83,600) + $316,992 = $233,392Which is equivalent to:$233,392 * -1 = $(233,392)Therefore, the best choice is A, $(316,992).

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