Frazer Corp sells several products. Information of average revenue and costs is as follows: Selling price per unit $ 30.00 Variable costs per unit: Direct material $ 7.00 Direct manufacturing labor $ 1.45 Manufacturing overhead $ 0.95 Selling costs $ 2.50 Annual fixed costs $ 140 comma 000 If the company decides to lower its selling price by 12.25%, but continues to sell 16 comma 000 units, the operating income is reduced by ________. A. $ 58 comma 880 B. $ 9 comma 600 C. $ 16 comma 000 D. $ 140 comma 000

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Dryomys Dryomys · Answer 1 · 2019-10-14T10:47:29+02:00

Answer: $58,800

Explanation:

Total variable costs:

= Direct material + Direct manufacturing labor + Manufacturing overhead + Selling costs

= $ 7.00 + $1.45 + 0.95 + 2.50

= $11.9

Currently:

Net operating income = Sales - Variable cost - Fixed cost

= ($30 × 16,000) - ($11.9 × 16,000) - $140,000

= $480,000 - $190,400 - $140,000

= $149,600

Now:

Net operating income = Sales - Variable cost - Fixed cost

= [$30(1-0.1225)] × 16,000 - ($11.9 × 16,000) - $140,000

= $421,200 - $190,400 - $140,000

= $90,800

Hence,

Decrease in net operating income = ($149,600 - $90,800)

= $58,800