Asked by Maryisabel Salinas on May 20, 2024
Verified
A manufacturing company is studying the feasibility of producing a new product. The selling price is expected to be $56. The new production line would manufacture up to 95,000 units at a variable cost of $35 per unit. Fixed costs would be $400,000. Variable selling and administration expenses would amount to $7. Determine operating income at 95% capacity.
A) $863,500
B) $874,500
C) $885,500
D) $895,500
E) $905,500
Operating Income
The profit realized from a business's ongoing operations, calculated before taxes and interest payments are deducted.
Variable Cost
Costs that fluctuate in direct proportion to changes in production volume or activity levels.
Fixed Costs
Business expenses that remain constant regardless of the level of production or sales.
- Apply CVP concepts in a manufacturing context to evaluate the feasibility of producing a new product.
- Determine the sales volume required to achieve a target operating income or profit.
Verified Answer
JC
Josue CastroMay 26, 2024
Final Answer :
A
Explanation :
Operating income at 95% capacity = (Selling price - Variable cost per unit - Variable selling and admin expenses) * Units at 95% capacity - Fixed costs. Units at 95% capacity = 95,000 * 95% = 90,250. Operating income = ($56 - $35 - $7) * 90,250 - $400,000 = $14 * 90,250 - $400,000 = $1,263,500 - $400,000 = $863,500.
Learning Objectives
- Apply CVP concepts in a manufacturing context to evaluate the feasibility of producing a new product.
- Determine the sales volume required to achieve a target operating income or profit.
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