Question

QUESTION 24

1. Cars and Motors Inc. sells 600 cars each month on average for $1,550,000 per unit. Monthly reports show that each unit has a variable cost of $675,000, with 40% on labor and 60% on materials used. Monthly fixed operating costs, such as utilities and lease rentals, are $89,500,000, while monthly fixed financing costs are $18,750,000. Monthly sales increased by 33% due to a successful marketing campaign.

Analyzing the effects of changes in net income in response to the presence of fixed costs, by how much would the percentage change in net income considering fixed costs exceed the percentage change in net income excluding fixed costs?

	a.	8.57%
	b.	10.13%
	c.	10.94%

Answer 1

The answer is 8.57%

Current net income = Sales - variable costs - fixed costs

= (1550,000 - 675,000)*600- 89,500,000 - 18.750,000

= $416,750,000

After increase in sales, net income = (1550,000 - 675,000)*600*1.33 - 89,500,000 - 18.750,000

= $590,000,000

Change = 41.57%

Change without fixed costs = change in sales i..e 33%

Hence, the percentage change in net income considering fixed costs exceed the percentage change in net income excluding fixed costs = 41.57%-33%

= 8.57%