Carrolton, Inc., currently sells widgets for $80 per unit. The variable cost is $30 per unit, and total fixed costs equal $240,000 per year. Sales are currently 20,000 units annually. The company is considering a 20% drop in selling price that it believes will raise units sold by 20%. Assuming all costs stay the same, what is the impact on income if this change is made?

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cadelgadoe cadelgadoe · Answer 1 · 2019-10-23T18:09:59+02:00

Answer:

Net income will be decrease by $184.000

Explanation:

In this case we need to calculate the estimated revenue with the expected price and sales.

The new price is equal to (actual price * (1-drop in selling price)) = (80*(1-20%))= 64

the expected sales is equal to (units sold * (1+% of increase of units sold))= (20.000*(1.2))= 24.000

Then we can calculate the current net income to be compared with the expected income

Actual income

Units price Total

Revenue 20,000.00 80.00 1,600,000.00

Variable cost 20,000.00 30.00 (600,000.00)

Contribution margin 20,000.00 50.00 1,000,000.00

Fixed expenses 20,000.00 12.00 (240,000.00)

Net income 760,000.00

Expected income

Units price Total

Revenue 24,000.00 64.00 1,536,000.00

Variable cost 24,000.00 30.00 (720,000.00)

Contribution margin 24,000.00 34.00 816,000.00

Fixed expenses 24,000.00 10.00 (240,000.00)

Net income 576,000.00

Once we have the actual income and the expected income we can compare what the variation is

760.000-576.000= 184.000