Question

Kidd Corp. reports the following for 2021 on 100,000 unit sales: Sales $1,000,000 Variable costs 550,000 Contribution margin 450,000 Fixed costs 300,000 Net income $ 150,000 Kidd's management is proposing a 5% price increase for 2022 ($10.00 to $10.50 per unit), and it expects the resulting weaker demand for its product to result in a 7% decrease in volume (100,000 units to 93,000 units). If the price change is adopted and the assumptions are correct, Kidd's break even point (in units) will __________ in 2022, and its net income will __________ in 2022. Group of answer choices increase; increase increase; decrease decrease; decrease decrease; increase.

Answer 1

Answer:

Decrease: Increase

Explanation:

Items	Old Plan	New plan	Difference
Sales	$1,000,000	=$10.50 × 93,000 = $976,500
Variable cost	$550,000	= 93000 × $5.50* = $511,500
Contribution Margin	$450,000	$465,000
Fixed Costs	$300,000	$300,000
Net income	$150,000	$165,000	$15,000 increase
break-even point**	66,667	60,000	6.667 decreased

* Variable cost per unit = $550,000 / 100,000 = $5.50 per unit

** Break-even point calulation:

old break even:

Contribution margin per unit = $450,000 ÷ 100,000 = $4.50

Break-even units = Fixed costs ÷ Contribution margin per unit

= $300,000 ÷ $4.50

= 66,666.67 or 66,667 units

Break even New:

Contribution margin per unit = $10.50 - $5.5 = $5

Break-even units = Fixed costs ÷ Contribution margin per unit

= $300,000 ÷ $5

= 60,000 units