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 spend $60,000 on advertising and reduce the selling price by $2 per box. Management believes the advertising along with the price reduction 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

Answer 1

Based on the changes,Tasty Tangerine's net income for the year will decrease by $16,000 from $140,000 to $124,000.

Data and Calculations:

Current sales unit = 50,000 boxes

Selling price per box = $25

Variable cost per box = $17

Total Fixed costs = $260,000

Contribution margin = $8 ($25 - $17)

• Net income based on current sales plan = $140,000 ($8 x 50,000 - $260,000)

New Plan's sales units = 74,000 boxes

Selling price per box = $23 ($25 - $2)

Variable cost per box = $17

Total Fixed costs = $320,000 ($260,000 + $60,000)

Contribution margin per box = $6 ($23 - $17)

• Net income based on new plan = $124,000 ($6 x 74,000 - $320,000)

Thus, the changes will cause Tasty's net income for the year to decrease by $16,000.

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