A company is able to implement one of two strategies regarding a particular prod

Question

A company is able to implement one of two strategies regarding a particular product: hire a marketing firm to increase sales 24% or assign a product procurement manager who can reduce material cost for the product by 8%. Currently, the product has sales of $10,900,000. The costs of materials are $8,000,000, labor costs are $1,450,000, and overhead costs are $750,000. What are the effects on net income of the two alternativestrategies?

The change in net income after the 24% increase in sales is ______________ (Enter your response as a whole number.)

Explanation / Answer

Initial net income = Sales - Total cost where

Total cost = Material cost + Labor cost + Overhead cost = $(8,000,000 + 1,450,000 + 750,000) = $10,200,000

Net income = $(10,900,000 - 10,200,000) = $700,000

After 24% increase, new sales = $10,900,000 x 1.24 = $13,516,000

New net income = New sales - Total cost = $(13,516,000 - 10,200,000) = $3,316,000

Change in net income = $(3,316,000 - 700,000) = $2,616,000

NOTE: It is assumes that higher sales does not change any costs because question does not mention it.

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