Question

Malfoy has the following information available: Direct Materials $18.00 per unit; Direct labor $32.00 per unit; Variable Overhead $6.00 per unit; Variable Selling & Administrative $4.00 per unit; Fixed overhead costs $600,000 annually; and fixed selling and administrative costs $150,000 annually. Selling price is $80.00 per unit. Malfoy is currently selling 50,000 units. An assistant manager claims that if selling price were decreased by $5 per unit, the units sales could be increased by 20,000 units, but fixed costs would also increase by $150,000. If the change is made, what will be the net income?

Answer 1

Contribution margin Income Statement

Sales (75*70,000)		5,250,000
Less : Variable costs
Direct Materials (18*70,000)	1,260,000
Direct labour (32*70,000)	2,240,000
Variable overhead (6*70,000)	420,000
Variable selling and administrative (4*70,000)	280,000
		(4,200,000)
Contribution margin		1,050,000
Less : Fixed Costs		(900,000)
Net Income		150,000

* Sales in units = 50,000 + 20,000 = 70,000

* Selling price per unit = 80 - 5 = 75

* Fixed costs = Fixed overhead costs + Fixed selling and administrative costs + Increase in fixed costs

= 600,000 + 150,000 + 150,000

= 900,000