Question

Pineapple Corp sold 80,000 units providing a profit of $60,000. The unit margin of safety for the period was 40,000 units. If the company increases its advertising expenses next period by $20,000, its sales will increase to 100,000 units. What would be the new net income next period?

Answer 1

$ 70,000

Working:

Total Sales units-Break even units				=	Margin of safety units
Total sales unit means number of units sold.
Break even units means unit level at which incomes are equal to all expenses(Fixed and variable).
Margin of safety is the remaining sales units after break even point.
From above it can be understood that Margin of safety means unit level after that which company's cost will be only variable costs.
Profit			$     60,000
÷ Unit Margin of safety			40,000
Profit per unit			$        1.50
In margin of safety units there is no fixed expenses.So profit is nothing but contribution margin per unit for all margin of safety units.
At the beginning 80000 units were sold and now sales units are 100000.
It means increase in Sales unit of 20000.
Increased Contribution Margin			(20000*$ 1.50)		$     30,000
Less:Increase Fixed expenses			(Advertising expenses)		$     20,000
Increased Net Income					$     10,000
And, new net income		=	Existing Net Income + Increase in net income
		=	$     60,000	+	$     10,000
		=	$     70,000
Thus, new net incoem next period is $ 70,000