Question

Tornado Valley Corporation's variable costs are 20% of sales revenue. The company is contemplating adding a new product line that will cost $57,000 to implement. If sales are expected to increase $180,000, by how much will the company's net *income increase? a. −21,000 b. 69,000 c. −3,000 d. 87,000

Answer 1

The net income increase is $144,000 when adding the new product line.

Step-by-step explanation:

To calculate the increase in net income, we need to subtract the variable costs of the new product line from the increase in sales revenue. The variable costs are 20% of the sales revenue. So, the variable costs for the new product line will be 20% of $180,000, which is $36,000 ($180,000 * 0.20). Therefore, the net income increase is the difference between the increase in sales revenue ($180,000) and the variable costs of the new product line ($36,000), which is $144,000 ($180,000 - $36,000). So, the company's net income will increase by $144,000 when adding the new product line.