Alvarez Company Is Facing an $8 Increase in the Variable

question 204

Multiple Choice

Alvarez Company is facing an $8 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.Alvarez has provided the following information regarding the current year results and the proposal made by the sales manager: $$\begin{array} { | l | r | r | } \hline & \text { Current Year } & \text { Proposal } \\\hline \text { Unit sales } & 27,000 & 18,000 \\\hline \text { Sales price per unit } & \$ 48 & \$ 54 \\\hline \text { Variable cost per unit } & \$ 32 & \$ 40 \\\hline \text { Fixed cost } & \$ 80,000 & \$ 96,000 \\\hline\end{array}$$ Relative to the current year,the sales manager's proposal will ________.

• A) decrease operating income by $324,000
• B) increase contribution margin by $196,000
• C) decrease the unit breakeven point
• D) decrease operating income by $196,000

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Definitions:

Delivery Cycle Time

The total time taken from receiving an order to delivering the product to the customer.

Fill Orders

The process of completing customer orders for goods or services.

Manufacturing Cycle Efficiency

a measure of the efficiency of the production process, typically calculated as the ratio of value-added time (the time spent actually transforming the product) to total cycle time.

Fill Orders

The process of completing customer orders by preparing and delivering the specified goods or services.