Billings Company has developed the following budgeted income statement: $\begin{array}{lrr}
\text {Sales Revenue $ (2,300 $ units $ \times \$ 14 $ sales price) } &\$32,200\
\text { Total Variable Expenses (2,300 $ \$ 6 $ per unit)} &\underline{(13,800)}\
\text { Contribution Margin} &18,400\
\text {Fixed Expenses } &\underline{(10,000)}\
\text {Net Income } &\underline{\$8,400}\

\end{array}$

The Company is experimenting with new engineering techniques and believes it can reduce variable cost to $4.50 per unit and significantly improve the product.The innovations would double fixed costs but the company expects to be able to increase sales to 3,500 units.If this strategy is pursued the company's budgeted net income will:
A) decrease by $4,250.
B) increase by $4,850.
C) increase by $13,250.
D) decrease by $4,150.

Question

Billings Company has developed the following budgeted income statement: $\begin{array}{lrr}
  \text {Sales Revenue \( (2,300 $ units $ \times \$ 14 $ sales price)  } &\$32,200\
 \text {  Total Variable Expenses (2,300 $ \$ 6 $ per unit)} &\underline{(13,800)}\
 \text {  Contribution Margin} &18,400\
 \text {Fixed Expenses  } &\underline{(10,000)}\
 \text {Net Income  } &\underline{\$8,400}\

\end{array}\)

The Company is experimenting with new engineering techniques and believes it can reduce variable cost to $4.50 per unit and significantly improve the product.The innovations would double fixed costs but the company expects to be able to increase sales to 3,500 units.If this strategy is pursued the company's budgeted net income will:
A) decrease by $4,250.
B) increase by $4,850.
C) increase by $13,250.
D) decrease by $4,150.

Quizplus · Accepted Answer

According to the new plan, the variable cost per unit will be reduced to $4.50, which will result in a total variable cost of 3,500 x $4.50 = $15,750. The fixed costs will double from $30,000 to $60,000. Therefore, the total cost will be $76,250. The sales revenue will increase from $31,500 to 3,500 x $12 = $42,000. Thus, the new budgeted net income will be $42,000 - $76,250 = -$34,250. 
However, the original budgeted net income was $31,500 - $21,000 = $10,500. So, the difference between the two is $10,500 - (-$34,250) = $44,750, which is an increase of $4,850 (Option B).

Billings Company Has Developed the Following Budgeted Income Statement The Company Is Experimenting with New Engineering Techniques and Believes