McPherson Company Is Facing a $2 Increase in the Variable

question 105

Multiple Choice

McPherson Company is facing a $2 increase in the variable costs of producing one of its products for the upcoming year.As a result,the sales manager has made a proposal to increase the sales price of the product while increasing the advertising budget at the same time.The sales price increase will lower sales volume,but the other changes may help the company maintain its profit margin.McPherson has provided the following information regarding the current year results and the proposal made by the sales manager: $$\begin{array} { | l | r | r | } \hline & \text { Current Year } & \text { Proposal } \\\hline \text { Unit sales } & 28,000 & 20,000 \\\hline \text { Sales price per unit } & \$ 48 & \$ 56 \\\hline \text { Variable cost per unit } & \$ 34 & \$ 36 \\\hline \text { Fixed cost } & \$ 76,000 & \$ 98,000 \\\hline\end{array}$$ Relative to the current year,the sales manager's proposal will ________.

• A)decrease operating income by $8,000
• B)increase contribution margin by $14,000
• C)decrease the unit breakeven point
• D)decrease operating income by $14,000

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Definitions:

Moral Hazard Problem

A situation where one party engages in risky behavior knowing that it is protected against the consequences by another party.

Government's Role

Refers to the duties and functions that a government carries out to ensure the stability and growth of its nation, including legislation, public service provision, and economic management.

Private Sector

The part of the economy that is owned and operated by individuals and companies for profit, as opposed to the state.

Information Difficulties

Challenges encountered in obtaining, processing, or understanding necessary information, often affecting decision-making processes.