Question

International Data Systems’ information on revenue and costs is relevant only up to a sales volume of 105,000 units. After 105,000 units, the market becomes saturated and the price per unit falls from \(14.00 to \)8.80. Also, there are cost overruns at a production volume of over 105,000 units, and variable cost per unit goes up from \(7.00 to \)8.00. Fixed costs remain the same at $55,000.

b. Compute operating income at 205,000 units.

Short answer

The Operating income of the company is $29,000.

Step-by-step solution

Contribution per unit

$\begin{array}{rcl}\mathrm{Contribution}& =& \mathrm{Revenue}\mathrm{per}\mathrm{unit}-\mathrm{Variable}\mathrm{cost}\mathrm{per}\mathrm{unit}\\ & =& \$8.80-\$8\\ & =& \$0.80\end{array}$

Operating income

$\begin{array}{rcl}\mathrm{Operating}\mathrm{income}& =& \left(\mathrm{Contribution}\times \mathrm{No}.\mathrm{of}\mathrm{units}\right)-\mathrm{Fixed}\mathrm{cost}\\ & =& \left(\$0.80\times 105,000\right)-\$55,000\\ & =& \$29,000\end{array}$