Eastwood Corporation manufactures numerous products, one of which is called Beta96. The company has provided the following data about this product:

Unit sales (a)

60,000

Selling price per unit

$

88.00

Variable cost per unit

$

53.00

Fixed expense

$

1,980,000

Management is considering decreasing the price of Beta96 by 8%, from $88.00 to $80.96.

The company's marketing managers estimate that this price reduction would increase unit sales by 10%, from 60,000 units to 66,000 units.

Assuming that the total fixed expense does not change, what net operating income will product Beta96 earn at a price of $80.96 if this sales forecast is correct?

Question

Eastwood Corporation manufactures numerous products, one of which is called Beta96. The company has provided the following data about this product:

Unit sales (a)

60,000

Selling price per unit

$

88.00

Variable cost per unit

$

53.00

Fixed expense

$

1,980,000

Management is considering decreasing the price of Beta96 by 8%, from $88.00 to $80.96.

The company's marketing managers estimate that this price reduction would increase unit sales by 10%, from 60,000 units to 66,000 units.

Assuming that the total fixed expense does not change, what net operating income will product Beta96 earn at a price of $80.96 if this sales forecast is correct?

BlackTom AI · Accepted Answer

We start by outlining the given data for Beta96:
- Original selling price per unit: $88.00
- Variable cost per unit: $53.00
- Original unit sales: 60,000
- Fixed expenses: $1,980,000

Step 1: Calculate original contribution and income to sanity-check the baseline.
- Original contribution per unit = 88.00 − 53.00 = $35.00
- Original total contribution = 60,000 × 35.00 = $2,100,000
- Original net operating income = $2,100,000 − $1,980,000 = $120,000

Step 2: Apply the marketing forecast for the price decrease.
- New price per unit after discount = $80.96 (8% reduction from $88.00)
- Expected new unit sales = 66,000 (an increase of 10% from 60,000)

Step 3: Compute the new contribution per unit with the reduced price.
- New contribution per unit = $80.96 − $53.00 = $27.96

Step 4: Compute the new total contribution and net operating income.
- New total contribution = 66,000 × 27.96 = 66,000 × 27.96
  Break it down: 27.96 × 66,000 = (27.96 × 66) × 1,000
  27.96 × 66 = 27.96 × 60 + 27.96 × 6 = 1,677.6 + 167.76 = 1,845.36
  So, 1,845.36 × 1,000 = $1,845,360
- New net operating income = $1,845,360 − $1,980,000 = −$134,640

Step 5: Evaluate each answer choice against the computed result.
- Option "$1,845,360" represents the new total contribution, not the net operating income. It omits subtracting fixed expenses, so this is not the net operating income.
- Option "$1,677,600" does not match any calculated figure from the scenario; it would correspond to an incorrect multiplication or an inconsistent contribution figure, so it’s incorrect.
- Option "($134,640)" matches the computed net operating income after the price decrease and sales forecast, indicating a loss of $134,640.
- Option "($302,400)" is not supported by any step in the calculation; it would require a different contribution or different fixed-cost treatment, so it’s incorrect.

In summary, when applying the 8% price reduction to $80.96 and increasing sales to 66,000 units while keeping fixed costs at $1,980,000, the math yields a net operating income of −$134,640, which aligns with the third option.

Similar Questions

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