Question

Dream Thrum, Co. is expecting the following changes will occur during the upcoming period: The sales...

Dream Thrum, Co. is expecting the following changes will occur during the upcoming period:

  • The sales price will increase from $106 to $111 per unit
  • Variable costs will increase from $36 to $45 per unit
  • Fixed costs will decrease from $821,700 to $702,300
  • Sales volume will decrease from 17,000 to 15,000 units

If all of these changes occur, by how much will net income change in the upcoming period as compared to the current net income (ignore taxes)?

a.

Increase by $111,400
b.

Increase by $80,600
c.

Decrease by $111,400
d.

Decrease by $287,700
e.

Decrease by $80,600
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Answer #1

Answer: Option e Decrease by $80600

Explanation:

Particulars

Current sales @17000 Units

 Expected Sales @15000 units
Sales Revenue $1802000 (17000*$106) $1665000 (15000*$111)
Less: Variable Costs ($612000) (17000*$36) ($675000) (15000*$45)
Contribution Margin $1190000    $990000
Less: Fixed Costs ($821700) ($702300)
Net Income $368300 $287700

Net Income of Current Sales = $368300

Net Income of Expected Change = $287700

Decrease of Net Income due to expected changes = $368300-$287700 = $80600

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