Question

1.A company has provided the following data:

Sales	12,000 units
Sales price	$100 per unit
Variable cost	$50 per unit
Fixed cost	$300,000

            If the dollar contribution margin per unit is increased by 10%, total fixed cost is decreased by 20%, and all other factors remain the same, by how much will net income increase?

2.   Hamada Company sells a single product. The product has a selling price of $100 per unit and variable expenses of 80% of sales. If the company's fixed expenses total $150,000 per year, what will the break-even be?

            

Answer 1

1.

As per the initial data:

Net income = Contribution margin per unit × Number of units – Fixed cost

                    = (100 – 50) × 12,000 – 300,000

                    = 50 × 12,000 – 300,000

                      = 600,000 – 300,000

                      = $300,000

As per the revised data:

Net income = Contribution margin per unit × (1 + rate of increase) × Number of units – Fixed cost × (1 – rate of decrease)

                    = (100 – 50) × (1.10) × 12,000 – 240,000 × 0.80

                    = 55 × 12,000 – 240,000

                    = 660,000 – 240,000

                   = $420,000

Increase in net income = 420,000 – 300,000

                                    = $120,000 (Answer)

2.

Contribution per unit = Selling price – Variable cost per unit

                                    = 100 – (100 × 80%)

                                    = 100 – 80

                                    = $20

Break-even (unit) = FixedCost / ContributionPer Unit

                             = $150,000 / $20

                             = 7,500 (Answer)

Break-even (sales) = Break-even (unit) × Selling price

                               = 7,500 × 100

                               = $750,000 (Answer)