Hancock Company manufactures and sells two lines of furniture,case goods and upholstery.During the most recent accounting period,the Case Goods and Upholstery Divisions sold 15,000 and 2,000 units,respectively.The company's most recent financial statements are shown below: (Do not round intermediate calculations.) $\begin{array}{lrrr}
&\text { Case Goods}&\text { Upholstery }\
\text {Sales}&\$1,600,000&\$400,000\
\text {Less cost of goods sold:}\
\text { Unit-level production cost } & 1,000,000 & 240,000 \
\text { Depreciation, production equipment } & \underline{ 240,000 }& \underline{60,000} \
\text { Gross margin } & \$ 360,000 & \$ 100,000\
\text { Less operating expenses: }\
\text {Unit-level selling and administrative costs }&60,000&50,000\
\text {Corporate-level facility expenses (fixed)}& \underline{52,000}& \underline{52,000}\
\text {Net income (loss)}& \underline{\$248,000}& \underline{\$(2,000)}
\end{array}$
If unit sales for both divisions increased 10%,the company would report which of the following?
A) A $52,000 increase in net income for the Upholstery Division
B) A 10% increase in total net income of the company
C) A decline in profit for the Upholstery Division.
D) A net income for the Upholstery Division of $9,000

Question

Hancock Company manufactures and sells two lines of furniture,case goods and upholstery.During the most recent accounting period,the Case Goods and Upholstery Divisions sold 15,000 and 2,000 units,respectively.The company's most recent financial statements are shown below: (Do not round intermediate calculations.) $\begin{array}{lrrr}
&\text { Case Goods}&\text {  Upholstery }\
\text {Sales}&\$1,600,000&\$400,000\
\text {Less cost of goods sold:}\
\text { Unit-level production cost } & 1,000,000 & 240,000 \
\text { Depreciation, production equipment } & \underline{ 240,000 }&  \underline{60,000} \
\text { Gross margin } & \$  360,000 & \$ 100,000\
\text { Less operating expenses: }\
\text {Unit-level selling and administrative costs }&60,000&50,000\
\text {Corporate-level facility expenses (fixed)}& \underline{52,000}& \underline{52,000}\
 \text {Net income (loss)}& \underline{\$248,000}& \underline{\$(2,000)}
\end{array}$
 If unit sales for both divisions increased 10%,the company would report which of the following?
A) A $52,000 increase in net income for the Upholstery Division
B) A 10% increase in total net income of the company
C) A decline in profit for the Upholstery Division.
D) A net income for the Upholstery Division of $9,000

Quizplus · Accepted Answer

To calculate the effect of a 10% increase in unit sales for both divisions, we first determine the new sales volume: Case Goods: 15,000 units * 110% = 16,500 units. Upholstery: 2,000 units * 110% = 2,200 units. For the Upholstery Division, the increase in sales (200 units) at the same unit contribution margin (Sales price per unit - Unit-level production cost per unit) will increase gross margin. The unit-level costs increase with sales, but fixed costs (depreciation and corporate-level facility expenses) remain unchanged. The initial net loss for the Upholstery Division is $(2,000). With increased sales and assuming the same profit margin per unit, the division moves from a loss to a positive net income, specifically calculated as follows: Additional revenue: $400,000 / 2,000 units = $200 per unit. Additional revenue for 200 units = 200 units * $200 = $40,000. Additional unit-level production cost: $240,000 / 2,000 units = $120 per unit. Additional cost for 200 units = 200 units * $120 = $24,000. Additional unit-level selling and administrative costs are not directly provided but can be assumed to increase proportionally with sales. The net effect is an increase in net income, overcoming the initial loss and resulting in a positive net income, with the exact figure depending on the specific costs and revenues per unit. The calculation for a net income of $9,000 for the Upholstery Division involves detailed figures not fully provided but follows from the logic that increased sales at a constant margin improve the division's profitability.

Hancock Company Manufactures and Sells Two Lines of Furniture,case Goods