Question

A company sells 500 sleds per month for $80. Variable costs are $41 per unit and fixed expenses are $3,500 per month. The company thinks that using a new material would increase sales by 70 units per month. If the new material increases variable costs by $4 per unit, the impact on net income would be a __________.

Answer 1

Answer:

net income is increased by $3,600

Explanation:

In this question we have to compare the net income based on two alternatives

Alternative 1

Sales $40,000        (500 sleds × $80)

Less: Variable cost $20,500     (500 sleds × $41)

Contribution margin $19,500

Less: Fixed cost -$3,500

Net income $16,000

Alternative 2

Sales $45,600        (570 sleds × $80)

Less: Variable cost $22,500     (500 sleds × $45)

Contribution margin $23,100

Less: Fixed cost -$3,500

Net income $19,600

As we can see that the net income is increased by $3,600 by taking a difference between the $19,600 and $16,000