International Data Systems' information on revenue and costs is relevant only up to a sales volume of 106,000 units. After 106,000 units, the market becomes saturated and the price per unit falls from $16.00 to $9.80. Also, there are cost overruns at a production volume of over 106,000 units, and variable cost per unit goes up from $8.00 to $8.50. Fixed costs remain the same at $56,000.

a. Compute operating income at 106,000 units. b. Compute operating income at 206,000 units.

Option A. $792,000

Option B. $211,800

Explanation:

At the level 106,000 Units, the price per unit and variable cost per unit will remain at $16 and $8 per unit.

Option A.

Sales (106,000 Units * $16)               $1,696,000

Variable cost (106,000* $8)               $848,000

Fixed costs                                            $56000    

Operating Profit                                  $792,000

Option B.

When the production exceeds 106,000 units level, the price per unit and variable cost per unit will remain at $9.8 and $8.5 per unit.

Sales (206,000 * $9.8)                      $2,018,800

Variable cost (206,000 * $8.5)          $1,751,000

Fixed costs                                           $56,000  

Operating Profit                                    $211,800

The profit has been decreased substantially due to increase in Marginal cost.

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