Asked by Rajbeer Sandhu on May 05, 2024
Verified
Twisdale Corporation manufactures numerous products, one of which is called Omicron-52. The company has provided the following data about this product: 
Management is considering decreasing the price of Omicron-52 by 4%, from $42.00 to $40.32. The company's marketing managers estimate that this price reduction would increase unit sales by 5%, from 160,000 units to 168,000 units. Assuming that the total traceable fixed expense does not change, what net operating income will product Omicron 52 earn at a price of $40.32 if this sales forecast is correct?
A) $2,131,200
B) $61,200
C) $167,760
D) $2,237,760
Traceable Fixed Expense
Fixed costs that can be directly linked to a specific segment of a business and can be eliminated if the segment is removed.
Net Operating Income
The profit generated from a company's normal business operations, excluding expenses and revenues from investments and other non-operational sources.
Price Reduction
A decrease in the selling price of goods or services, typically aimed at increasing sales volume or clearing inventory.
- Master the procedures for evaluating net operating income in different pricing and sales environments.
- Recognize the consequence of fixed and variable costs on the net operating earnings.
Verified Answer
ZK
Zybrea KnightMay 08, 2024
Final Answer :
C
Explanation :
To calculate the net operating income, we need to first determine the contribution margin per unit:
Contribution margin per unit = Selling price per unit - Variable expenses per unit
The selling price per unit after the price reduction of 4% is $40.32, and the variable expenses per unit are given as follows:
Direct materials: $13.44
Direct labor: $5.04
Variable manufacturing overhead: $2.16
Variable selling expenses: $1.68
Total variable expenses per unit = $22.32
Contribution margin per unit = $40.32 - $22.32 = $18.00
Next, we can calculate the total contribution margin by multiplying the contribution margin per unit by the expected unit sales:
Total contribution margin = Contribution margin per unit x Expected unit sales
= $18.00 x 168,000 = $3,024,000
Since the total traceable fixed expenses do not change, the net operating income can be computed as follows:
Net operating income = Total contribution margin - Total traceable fixed expenses
= $3,024,000 - $2,856,240
= $167,760
Therefore, the correct answer is C.
Contribution margin per unit = Selling price per unit - Variable expenses per unit
The selling price per unit after the price reduction of 4% is $40.32, and the variable expenses per unit are given as follows:
Direct materials: $13.44
Direct labor: $5.04
Variable manufacturing overhead: $2.16
Variable selling expenses: $1.68
Total variable expenses per unit = $22.32
Contribution margin per unit = $40.32 - $22.32 = $18.00
Next, we can calculate the total contribution margin by multiplying the contribution margin per unit by the expected unit sales:
Total contribution margin = Contribution margin per unit x Expected unit sales
= $18.00 x 168,000 = $3,024,000
Since the total traceable fixed expenses do not change, the net operating income can be computed as follows:
Net operating income = Total contribution margin - Total traceable fixed expenses
= $3,024,000 - $2,856,240
= $167,760
Therefore, the correct answer is C.
Learning Objectives
- Master the procedures for evaluating net operating income in different pricing and sales environments.
- Recognize the consequence of fixed and variable costs on the net operating earnings.