Kern Company prepared the following tentative budget for next year: The sales manager argues that the unit selling price could be increased by 20%,with an expected volume decrease of only 10%.If Kern incorporates these changes in its budget,what should be the budgeted net income?

Question

Kern Company prepared the following tentative budget for next year:  The sales manager argues that the unit selling price could be increased by 20%,with an expected volume decrease of only 10%.If Kern incorporates these changes in its budget,what should be the budgeted net income?

Quizplus · Accepted Answer

The original budgeted net income is $100,000 ($500,000 sales - $300,000 costs).

If the unit selling price is increased by 20%, the new selling price would be $120 ($100 x 1.2).

With a 10% decrease in volume, the new budgeted sales would be $450,000 [($500,000 x 0.9) x $120)].

The variable costs of sales are $70 per unit, so the total variable costs for the new sales volume would be $315,000 [$450,000 x ($70/$120)].

The new budgeted net income would be $135,000 ($450,000 - $315,000).

Therefore, the correct answer is C) $120,000.

Kern Company Prepared the Following Tentative Budget for Next Year