Question

Billings Company has developed the following budgeted income statement: Sales Revenue (2,300 units × $14 sales price) $ 32,200 Total Variable Expenses (2,300 × $6 per unit) (13,800 ) Contribution Margin 18,400 Fixed Expenses (10,000 ) Net Income $ 8,400 The Company is experimenting with new engineering techniques and believes it can reduce variable cost to $4.50 per unit and significantly improve the product. The innovations would double fixed costs but the company expects to be able to increase sales to 3,500 units. If this strategy is pursued the company's budgeted net income will:

Answer 1

If the company pursues the strategy, the budgeted net income will be -$3,550.

Step-by-step explanation:

In order to calculate the budgeted net income if the company pursues the strategy, we need to adjust the variable cost and sales units in the budgeted income statement. The new variable cost per unit is $4.50, and the increased fixed expenses will be $20,000. The new sales units will be 3,500. With these adjustments, we can calculate the new budgeted net income as follows:

New Total Variable Expenses (3,500 units x $4.50 per unit) = $15,750

New Contribution Margin = Sales Revenue - New Total Variable Expenses = $32,200 - $15,750 = $16,450

New Net Income = New Contribution Margin - Fixed Expenses = $16,450 - $20,000 = -$3,550

Therefore, if the company pursues the strategy, the budgeted net income will be -$3,550.

Answer 2

The income will increase to 13,250 dollars.

Step-by-step explanation:

New scenario:

Sales 3,500 units x $14 sales price = 49, 000

Variable expense 3,500 x $4.5 per unit = (15, 750)

Contribution Margin 33, 250

Fixed Expense: 10,000 x 2(they doubled) = (20,000)

Net Income: 13, 250

We have to recalculate the complete income statement as all the variables are affected in this strategy.