Question

Acme Company has variable costs equal to 30% of sales. The company is considering a proposal that will increase sales by $12,000 and total fixed costs by $8,400. By what amount will net income increase

Answer 1

Answer:

$0

Explanation:

The net income is the difference between the sales and total cost which comprises of the variable cost and fixed cost. The sales and variable cost are dependent on the number of units sold.

Let

u = number of units

s = selling price per unit

v = variable cost per unit

F = Fixed cost

I = Net income

I = su - F - vu

but vu = 0.3su

Hence

I = su - 0.3su - F = 0.7su - F

Given that the proposal will increase sales by $12,000,

New sales = su + 12000          ( in $)

and total fixed costs by $8,400

New fixed cost = F + 8400

New variable cost = 0.3( su + 12000) = 0.3su + 3600

New net income = su + 12000 - 0.3su - 3600 - F - 8400

= 0.7su - F

New net income is same as the old net income hence no increase.