Woodridge Corporation manufactures numerous products, one of which is called Alpha-32. The company has provided the following data about this product: Unit sales (a) 75,000 Selling price per unit $ 76.00 Variable cost per unit $ 61.00 Traceable fixed expense $ 1,325,000 Management is considering increasing the price of Alpha-32 by 7%, from $76.00 to $81.32. The company’s marketing managers estimate that this price hike would decrease unit sales by 6%, from 75,000 units to 70,500 units. Assuming that the total traceable fixed expense does not change, what net operating income will product Alpha-32 earn at a price of $81.32 if this sales forecast is correct?

Woodridge Corporation

The net operating income of Alpha-32 at a price of $81.32 is:

$107,560

Explanation:

a) Data and Calculations:

                                   Normal          Change

Unit sales                   75,000            70,500

Selling price               $76.00            $81.32

Total Sales           $5,700,000   $5,733,060

Variable cost          4,575,000     4,300,500

Fixed costs             1,325,000      1,325,000

Total costs          $5,900,000   $5,625,500

Net income/Loss  ($200,000)      $107,560

b) Woodridge Corporation will be posting a net operating income of $107,560 against the earlier net loss of $200,000 under the old pricing regime.  This suggests that it pays the company better to increase the price of its Alpha-32 and incur some unit sales reduction than to continue with the former unit sales of 75,000 with an operating loss of $200,000.

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