Capital One Produces a Single Product, Which It Sells for $8.00

Capital One produces a single product, which it sells for $8.00 per unit. Variable costs per unit equal $3.20. The company expects short-term fixed costs to be $7,200 for the coming month, at the projected sales level of 20,000 units. Management is considering several alternative actions designed to improve operating results. In conjunction with this, they have created a profit-planning (that is, a CVP) model, which can be used to evaluate different scenarios.

Capital One's management believes that a 10% reduction in the selling price will increase sales volume by 10%. If this plan is implemented, then operating profit should:

A) Increase by approximately $8,000 per month.
B) Remain approximately the same.
C) Decrease by approximately $8,000 per month.
D) Decrease by approximately $16,000 per month.
E) Increase by approximately $16,000 per month.

Correct Answer:

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