UESTION 9 At a volume of 3,000 units, Rudy Inc. reported the following: Sales $2

Question

UESTION 9 At a volume of 3,000 units, Rudy Inc. reported the following:

Sales $2,400,000 Variable Costs $900,000 Fixed Costs $650,000

1. Compute the operating leverage for Rudy Inc. Round to 2 decimal places.

2. What would be the increase in Net Income from a 20% increase in Sales? To be marked correct, please give the % increase rather than $ amount, round answer to 2 places and state in decimal form i.e. 75% becomes 0.75.

3. If the company eliminates sales comissions of $100 per unit by changing to a flat salary increase of $400,000 for its sales managers, by what dollar amount would net income change? Note increases as a positive number, decreases as a negative number.

4. If instead of changing the sales commissions (treat independently from #11), the company reduces its selling price by $100 per unit, resulting in an increase in sales of 900 units, what is the impact to net income in dollars? Note increases with a positive number, decreases with a negative number.

5. If instead, the company decides to reduce the selling price by $100, AND increase advertising by $200,000 and expects sales to increase by 1,200 units, what would be the impact on net income in dollars? Note increases with a positive number, decreases with a negative number.

Explanation / Answer

1. Operating Leverage = Fixed Costs / Total Costs Hence, Operating Leverage = $ 650,000 / ($ 650,000 + $ 900,000) % = 41.94% 2. The existing Net Income of Rudy Inc. will be $ 2,400,000 - $ 900,000 - $ 650,000 = $ 850,000. If the sales increase by 20%, there will be a corresponding increase in Variable Costs also The current percentage of variable costs to sales is $ 900,000 / $ 2,400,000 = 37.50% If the sales increase by 20%, then : Revised Sales 2880000 Revised Variable Costs 1080000 Fixed Costs 650000 Revised Net Income 1150000 Increase in Net Income is $ 300,000, which is 35.29% more than the original net income. 3. Existing Net Income = $ 850,000 Variable Costs per unit for existing Net Income = $ 900,000 / 3,000 = $ 300 per unit From this, $ 110 per unit for sales commissions is eliminated Hence, the revised variable costs per unit = $ 190 Against the sales commissions, there is a fixed salary increase of $ 400,000 for managers Hence the revised Net Income will be Sales 2400000 Variable Costs 570000 Fixed Costs 1050000 Revised Net Income 780000 By eliminating the sales commissions, there will be a reduction in Net Income of -$70,000. 4. The existing Net Income = $ 850,000. Sales price per unit per the existing scenario = $ 2,400,000 / 3,000 = $ 800 per unit The revised sales price is $ 800 - $ 100 = $ 700 per unit The revised number of units are 3,000 + 900 = 3,900. Based on the revised scenario, the Net Income of Rudy Inc will be Sales 2730000 Variable Costs 1170000 Fixed Costs 650000 Revised Net Income 910000 By reducing the sales price per unit and increasing the number of units sold, the Net Income of Rudy Inc. increases by $ 60,000. 5. The existing Net Income of Rudy Inc. is $ 850,000 Revised Scenario Sales Price per unit $ 700 No. of units sold 4200 Additional Fixed Expenses $ 200,000 The net income under the revised scenario will be Sales 2940000 Variable Costs 1260000 Fixed Costs 850000 Revised Net Income 830000 By reducing the sales price per unit and increasing the number of units sold, plus an additional advertising expense, the Net Income of Rudy Inc. decreases by -$ 20,000.

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