Billings Company has developed the following budgeted income statement: The Company is experimenting with new engineering techniques and believes it can reduce variable cost to $4.50 per unit and significantly improve the product. The innovations would double fixed costs but the company expects to be able to increase sales to 3,500 units. If this strategy is pursued the company's budgeted net income will:
A) decrease by $4,250.
B) increase by $4,850.
C) increase by $13,250.
D) decrease by $4,150.

Question

Billings Company has developed the following budgeted income statement:  The Company is experimenting with new engineering techniques and believes it can reduce variable cost to $4.50 per unit and significantly improve the product. The innovations would double fixed costs but the company expects to be able to increase sales to 3,500 units. If this strategy is pursued the company's budgeted net income will:
A) decrease by $4,250. 
B) increase by $4,850. 
C) increase by $13,250. 
D) decrease by $4,150.

Quizplus · Accepted Answer

Sales - Variable costs - Fixed costs = Profit
($14 per unit × 3,500 units) - ($4.50 per unit × 3,500 units) - ($10,000 × 2) = $13,250
New profit - Old profit = Change in profit
$13,250 - $8,400 = $4,850

Billings Company Has Developed the Following Budgeted Income Statement