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:

Miles

A unit of distance or length measure equal to 5,280 feet or approximately 1.609 kilometers, used mainly in the United States.

Square

A polygon with four equal sides and four right angles; also, the mathematical operation of multiplying a number by itself.

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A method in physics and engineering to check the consistency of equations involving physical quantities by tracking units and dimensions.

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The basic unit of time in the International System of Units (SI), equal to one sixtieth of a minute.