Management is considering the following course of action to increase net income:

Question

Management is considering the following course of action to increase net income: Reduce the selling price by 10%, with no changes to unit variable costs or fixed costs. Management is confident that this change will increase unit sales by 28%.

Cottonwood Company reports the following operating results for the month of April.

COTTONWOOD COMPANY CVP Income Statement For the Month Ended April 30, 2011 Total Per Unit Sales (9,000 units) $477,000 $53.00 Variable costs 257,580 28.62 Contribution margin 219,420 $24.38 Fixed expenses 163,346 Net income $ 56,074

Management is considering the following course of action to increase net income: Reduce the selling price by 10%, with no changes to unit variable costs or fixed costs. Management is confident that this change will increase unit sales by 28%.

Explanation / Answer

1st part Breakeven point in units = 163346/24.38 = 6700 units Breakeven point in revenue = 6700 x 53 = $355100 Margin of safety = 477000 - 355100 = $121900 2nd part New selling price = 53 x 0.90 = $47.70 New contribution per unit = 47.70 - 28.62 = $19.08 New sales volume = 9000 x 1.28 = 11520 units Breakeven point in units = 163346/19.08 = 8561 units Breakeven point in revenue = 163346 / (19.08/47.70) = $408365 Margin of safety = 11520 x 47.7 - 408365 = $141139 Hope this helps!

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