7Mimosa Company produces headsets for cell phones. The following unit cost infor

Question

7Mimosa Company produces headsets for cell phones. The following unit cost information is available: Selling price per headset Variable expense ratio Current annual sales Current fixed costs S20 60% 10,000 units $36,000 The sales manager proposes that for next year, Mimosa should reduce the selling price. hire salespcople and pay them sales commission, and increase advertising spending to drastically increase unit sales. Assume the following: Reduce selling price by Sales commission 4% 5% of price Required increase in advertising spending Increase in unit sales How will net income be impacted? A. Net income will increase byS B. Net income will decrease by S 36.960 36.960 10.080 10,080 Net income will increase by S D. Net income will decrease by S E. None of the Above

Explanation / Answer

Present net income: Sales 200000 Variable expenses 120000 Contribution margin 80000 Fixed costs 36000 Net income 44000 Revised sales = 10000*1.4 = 14000 Revised selling price = 20*0.96 = $19.2 Revised net income: Sales 268800 =14000*19.2 Variable expenses 174720 =(14000*11.52)+(14000*19.2*0.05) Contribution margin 94080 Fixed costs 40000 =36000+4000 Net income 54080 Net income will increase by $10080 (54080-44000)

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