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 operating 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 operating income?

Quizplus · Accepted Answer

By increasing the unit selling price by 20% and only expecting a volume decrease of 10%, the company will have a net increase in revenue. The new budgeted revenue would be calculated as follows:

($3 x 1.2) x 90,000 = $324,000

The budgeted variable costs would remain the same at $2 per unit. The budgeted fixed costs would also remain the same at $150,000.

Budgeted operating income = $324,000 - ($2 x 90,000) - $150,000 = $120,000

Therefore, the budgeted operating income with the proposed price increase would be $120,000.

Kern Company Prepared the Following Tentative Budget for Next Year