Impala Industries manufactures a component used by car manufacturers. Impala can produce 1,000,000 components per year. A foreign car manufacturer has approached Impala with an offer to purchase 120,000 components at price of $6 per unit. Impala's results for last year are as follows:
|Sales(900,000 at $8)||$7,200,000|
If Impala accepts the offer, it will only be able to sell 880,000 units at the regular price due to its capacity constraints. What wilt Impala&tt39;s total operating income be next year if it accepts the offer?
This question calls for basic familiarity with a company's income statement, which presents revenues, expenses, and profit/loss for a period of time. The income statement differentiates between fixed and variable expenses.
Answer and Explanation:
The answer is "b. $2,410,000."
The first step is to determine the variable cost per unit. It is $3 ($2,700,000/900,000). Now we can project the operating income, as outlined below.
- Revenue = 880,000 * $8 + 120,000 * 6 = $7,760,000
- Variable costs = 1,000,000 * $3 = $3,000,000
- Contribution margin = $7,760,000 - $3,000,000 = $4,760,000
- Operating income = $4,760,000 - $2,350,000 = $2,410,000
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from Accounting 101: Financial AccountingChapter 2 / Lesson 2