Question

Tasty Tangerine is currently selling 50,000 boxes for $25 per box. Variable cost per box is $17 and fixed costs total $260,000. A plan is being considered to increase advertising and reduce the selling price. The advertising would increase fixed costs by $60,000. Management believes the advertising along with a $2 reduction in the selling price per box will increase sales volume by 24,000 boxes. If management's predictions are correct, making these changes will cause net income for the year to ______. increase by $132,000 increase by $44,000 decrease by $104,000 decrease by $16,000

Answer 1

Answer:

decrease by $16,000

Explanation:

We know that,

The net income = Sales - variable cost - fixed expense

The sales = Sales units × selling price per unit

                = 50,000 boxes × $25

                =  $1,250,000

The variable cost = Sales units × variable cost per unit

                             = 50,000 boxes × $17

                             =  $850,000

And, the fixed cost is  $260,000

So, the net income would equal to

= $1,250,000 - $850,000 -  $260,000

= $140,000

Since, the sales units are increased by $24,000 units, so new sales units is 74,000 units

And, the sales per unit is decreased by 2 So, new sales per unit is $23

So, the new sales

= Sales units × selling price per unit

= $74,000 × $23 = $1,702,000

The variable cost = Sales units × variable cost per unit

So, the new variable cost equals to

= 74,000 units × $17

= $1,258,000

And the fixed expense would increased by the $60,000 so new fixed cost is $320,000

So, the new net income would be equal to

= $1,702,000 - $1,258,000  - 320,000

= $124,000

If we compare these two net income, then the difference would be

=  $140,000 -  $124,000

= $16,000 decrease