DVD Now is a direct marketer of popular movies. Following is information about i

Question

DVD Now is a direct marketer of popular movies. Following is information about its revenue and cost structure:

Selling Price $13.00 per DVD
Variable Costs:
Production (manufacturing costs) $3.00 per DVD
Selling and Administration (non-manufacturing costs) $1.00 per DVD
Fixed Costs:
Production (manufacturing costs) $1,000,000 per year
Selling and Administration (non-mfg costs) $3,000,000 per year

Assume that the current sales level is 600,000 units. What impact would a 15% increase in sales have on income?

A. Income would increase 15%
B. Income would increase 52%
C. Income would increase $1,170,000
D. Income would increase 58% This is the answer.

Explanation / Answer

Current Sales 15% increase in sales $600,000 $690,000 Sales $7,800,000 $8,970,000 Variable Cost       Production (manufacturing costs) $1,800,000 $2,070,000       Selling and Administration (non-manufacturing costs) $600,000 $690,000 Fixed Cost       Production (manufacturing costs) $1,000,000 $1,000,000       Selling and Administration (non-manufacturing costs) $3,000,000 $3,000,000 Net Income $1,400,000 $2,210,000 Increase in income $810,000 % Increase in income 810000/1400000*100 % Increase in income 58%

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