Zhou Company Is Facing a $7 Increase in the Variable

question 10

Multiple Choice

Zhou Company is facing a $7 increase in the variable cost of producing one of its products for the upcoming year.Because of this situation,the sales manager has made a proposal to increase the selling price of the product while increasing the advertising budget at the same time.The price increase will lower sales volume,but the other changes may help the company maintain its profit margins.Zhou has provided the following information regarding the current year results and the proposal made by the sales manager: $$\begin{array} { | l | r | r | } \hline & \text { Current Year } & \text { Proposal } \\\hline \text { Unit sale } & 30,000 & 20,000 \\\hline \text { Sales price per unit } & \$ 52 & \$ 58 \\\hline \text { Variable cost per unit } & \$ 34 & \$ 41 \\\hline \text { Fixed cost } & \$ 78,000 & \$ 96,000 \\\hline\end{array}$$ Relative to the current year,the sales manager's proposal will ________.

• A) decrease operating income by $158,000
• B) increase contribution margin by $60,000
• C) decrease the unit breakeven point
• D) decrease operating income by $218,000

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