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

If Kern increases the unit selling price by 20%, the selling price per unit will become $3.6 ($3 x 1.2). If the expected volume decreases by 10%, the total units sold will be 9,000 ($10,000 x 0.90). Therefore, the total sales revenue will be 9,000 x $3.6 = $32,400. 
The variable cost per unit remains the same at $1.50. Therefore, the total variable cost will be 9,000 x $1.5 = $13,500. 
The contribution margin per unit will be $3.6 - $1.5 = $2.1. Therefore, the total contribution margin will be 9,000 x $2.1 = $18,900. 
The fixed costs remain the same at $150,000. 
Therefore, the budgeted operating income will be $18,900 - $150,000 = $120,000. 
Thus, the best choice is C, with a budgeted operating income of $120,000.

Kern Company Prepared the Following Tentative Budget for Next Year