Question

JVL Inc. sells its only product for $10 per unit. Variable costs are $4 per unit and total fixed costs are $40,000. The company is currently selling 10,000 units per year. By how much will profits increase if sales increase 1,500 units?

Answer 1

Answer:

$9,000

Explanation:

Profit = Total revenue - Total cost

Total cost = Total fixed cost + Total variable cost

Fixed cost = $40,000

Variable costs = variable cost per unit × total output = $4 × 10,000 = $40,000

Total cost = $40,000 + $40,000 = $80,000

Total revenue = price × output = $10 × 10,000 = $100,000

Profit = $100,000 - $80,000 = $20,000

If sales increases by 1500, output would be 11,500

Total variable cost = 11500 × $4 = $46,000

Total cost = $40,000 + $46,000 = $86,000

Revenue = $10 x 11500 = $115,000

Profit = $115,000 - $86,000 = $29,000

Increase in profit = $29,000 - $20,000 = $9,000

I hope my answer helps you

Answer 2

Answer:

$9,000

Explanation:

Current income statement:

total revenue = $10 per unit x 10,000 units = $100,000

total variable costs = $4 per unit x 10,000 units = (40,000)

total fixed costs = ($40,000)

net profits = $20,000

If sales increase by 1,500 units:

total revenue = $10 per unit x 11,500 units = $115,000

total variable costs = $4 per unit x 11,500 units = (46,000)

total fixed costs = ($40,000)

net profits = $29,000

net income increased by $29,000 - $20,000 = $9,000

you can also calculate this using the contribution margin per unit = selling price - variable cost per unit = $10 - $4 = $6 per unit

Since the company has already passed its break even point and was making a profit, every additional unit sold increases net profits = 1,500 units x $6 per unit = $9,000