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 11%, with no changes to unit variable costs or fixed costs. Management is confident that this change will increase unit sales by 31%.

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 (8,000 units) $440,000 $55.00 Variable costs 228,800 28.60 Contribution margin 211,200 $26.40 Fixed expenses 174,240 Net income $ 36,960

Management is considering the following course of action to increase net income: Reduce the selling price by 11%, with no changes to unit variable costs or fixed costs. Management is confident that this change will increase unit sales by 31%.

Explanation / Answer

1st part Breakeven point in units = 174240/26.4 = 6600 units Breakeven point in dollars = 6600 x 55 = $363000 Margin of safety = 440000 - 363000 = $77000 2nd part New selling price = 55 x 0.89 = $48.95 New contribution per unit = 48.95 - 28.60 = $20.35 New sales unit = 8000 x 1.31 = 10480 units Breakeven point in units = 174240/20.35 = 8562 units Breakeven point in dollars = 174240 / (20.35/48.95) = $419118 Margin of safety = 10480 x 48.95 - 419118 = $93878 Hope this helps!

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