Cluck Cluck Co. produces 1,000 packs of chicken feed per month. Sales price is $
ID: 2456620 • Letter: C
Question
Cluck Cluck Co. produces 1,000 packs of chicken feed per month. Sales price is $4 per pack. Variable cost is $1.50 per unit, and fixed costs are $1,800 per month. Management is considering adding a vitamin supplement to improve the value of the product. The variable cost will go up from $1.50 to $1.90 per unit, and fixed costs will go up by 20%. Cluck Cluck will price the new product at $5 per pack. How will this affect operating income?
A) Operating income will go down by $150 per month.
B) Operating income will remain unchanged.
C) Operating income will go down by $400 per month.
D) Operating income will go up by $240 per month.
Explanation / Answer
Option D – Operating income will go up by $240 per month is correct option.
Please find the solution to it in below table:
Cluck Cluck Co.
Existing capacity
After adding a vitamin supplement
Per unit
Calculation
Total amount (in $)
Per unit
Calculation
Total amount (in $)
Sales
$ 4.00
$ 4 X 1000 units
$ 4,000.00
$ 5.00
$ 5 X 1000 units
$ 5,000.00
Less:
Variable Cost
$ 1.50
$ 1.5 X 1000 units
$ 1,500.00
$ 1.90
$ 1.9 X 1000 units
$ 1,900.00
Less:
Fixed Cost
$ 1,800.00
$ 1,800.00
$ 2,160.00
$ 2,160.00
Net Operating profit
$ 700.00
$ 940.00
Cluck Cluck Co.
Existing capacity
After adding a vitamin supplement
Per unit
Calculation
Total amount (in $)
Per unit
Calculation
Total amount (in $)
Sales
$ 4.00
$ 4 X 1000 units
$ 4,000.00
$ 5.00
$ 5 X 1000 units
$ 5,000.00
Less:
Variable Cost
$ 1.50
$ 1.5 X 1000 units
$ 1,500.00
$ 1.90
$ 1.9 X 1000 units
$ 1,900.00
Less:
Fixed Cost
$ 1,800.00
$ 1,800.00
$ 2,160.00
$ 2,160.00
Net Operating profit
$ 700.00
$ 940.00
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