A Small Business Produces a Single Product and Reports the Following

question 9

Multiple Choice

A small business produces a single product and reports the following data:
$$\begin{array} { | l | l | l | } \hline \text { Price } & \$ 10.59 & \text { per unit } \\\hline \text { Variable cost } & \$ 5 & \text { per unit } \\\hline \text { Fixed cost } & \$ 24,000 & \text { per month } \\\hline \text { Volume } & 13,000 & \text { per month } \\\hline\end{array}$$
If the company reduces its price to $7.75,it believes that the volume will go up to 15,000 units.
How would this change affect operating profit?

• A) It will go up by $48,670.
• B) It will go up by $31,420.
• C) It will go down by $48,670.
• D) It will go down by $31,420.

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Definitions:

Plant Capacity

The maximum level of output that a facility can sustain to produce goods or services under given conditions.

Variable Costs

Costs that vary directly with the level of production or sales.

Total Cost Method

An accounting approach that sums up the direct, indirect, fixed, and variable costs associated with manufacturing a product.

Cost-Plus Approach

A pricing strategy where the selling price is determined by adding a specific markup to a product's cost to ensure profitability.