Selwyn Fabrics sold 60,000 yards of upholstery fabric for $22 per yard. The company's unit product cost using process costing is $5 per yard and the company has fixed costs of $86,000 per month. The company predicts that a $2 decrease in the selling price will generate a 12% increase in sales during the next period. If the company lowers the price, which of the following will occur in the next period?

Question

Quizplus · Accepted Answer

1. Sales revenue from the current period = 60,000 yards × $22 = $1,320,000
2. Total variable cost for the current period = 60,000 yards × $5 = $300,000
3. Total fixed costs for the current period = $86,000
4. Total cost for the current period = $300,000 + $86,000 = $386,000
5. Net income for the current period = $1,320,000 - $386,000 = $934,000

If the selling price decreases by $2 and sales increase by 12%, then the new revenue would be:

1. New sales volume = 60,000 yards × 1.12 = 67,200 yards 
2. New selling price = $20 per yard 
3. New sales revenue = 67,200 yards × $20 = $1,344,000
4. New total variable cost = 67,200 yards × $5 = $336,000
5. Total fixed costs remain the same at $86,000
6. Total cost for the new period = $336,000 + $86,000 = $422,000
7. Net income for the new period = $1,344,000 - $422,000 = $922,000

The new net income is lower than the current net income, which means that net income will decrease by $12,000 if the company lowers the price. Therefore, the correct answer is B.

Selwyn Fabrics Sold 60,000 Yards of Upholstery Fabric for $22