Question

Cora Corporation produces refrigerator units. The company's normal production and sales volume of Standard units is 2,750 units per month, and units sell for $860 each. The costs of manufacturing and marketing a Standard model are as follows: Variable manufacturing cost per unit Variable marketing cost per unit Fixed product cost Fixed period cost $ 230 35 275,000 220,000 The company is considering diversifying the product line to include two additional models, Economy and Deluxe, which would sell for $720 and $860 per unit, respectively. The costs of manufacturing these new models are as follows: Variable manufacturing cost Variable marketing cost Economy 40% below Standard 5% above Standard Deluxe $485 Twice Standard Total fixed product and period costs are expected to remain unchanged. Cora expects to sell 1,100 units of the Economy model and 850 units of Deluxe model per month. The company cannot expand its production capacity beyond its current level of 2,750 units. Required: 1. If Standard Model is the only product what would the Operating income be? Operating income

Answer 1

Solution 1:

Operating income for standard model = Sales - Variable cost - Fixed costs

= (2750*$860) - (2750*$230 + 2750*$35) - ($275,000 + $220,000)

= $2,365,000 - $728,750 - $495,000

= $1,141,250