THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 34 AND 35. Katie Enterprises repo

Question

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 34 AND 35.

Katie Enterprises reports the year-end information from 20X4 as follows:

Katie is developing the 20X5 budget. In 20X5 the company would like to increase selling prices by 4%, and as a result expects a decrease in sales volume of 10%. All other operating expenses are expected to remain constant. Assume that COGS is a variable cost and that operating expenses are a fixed cost.

Sales (70,000 units) $560,000 Cost of goods sold 210,000 Gross margin 350,000 Operating expenses 200,000 Operating income $150,000

Explanation / Answer

current price = 560,000/70,000 = $8
4% increase in price: 8*1.04 = $8.32
10% decrease in volume: 70,000*.9 = 63,000
New sales: $8.32 * 63,000 = $524,160

210,000/560,000 = .375

$524,160*.375 = $196,560

answer: B, $196,560

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