Billings Company has developed the following budgeted income statement: 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:
$$\begin{array} { | l | r | }
\hline \text { Sales Revenue } ( 2,300 \text { units } x ~ \$ 14 \text { sales price } ) & \$ 32,200 \
\hline \text { Total Variable Expenses } ( 2,300 \times \$ 6 \text { per unit) } & ( 13,800 ) \
\hline \text { Contribution Margin } & 18,400 \
\hline \text { Fixed Expenses } & ( 10,000 ) \
\hline \text { Net Income } & \$ 8,400 \
\hline & \
\hline
\end{array}$$
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: 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:
$$\begin{array} { | l | r | } 
\hline \text { Sales Revenue } ( 2,300 \text { units } x ~ \$ 14 \text { sales price } ) & \$ 32,200 \
\hline \text { Total Variable Expenses } ( 2,300 \times \$ 6 \text { per unit) } & ( 13,800 ) \
\hline \text { Contribution Margin } & 18,400 \
\hline \text { Fixed Expenses } & ( 10,000 ) \
\hline \text { Net Income } & \$ 8,400 \
\hline & \
\hline
\end{array}$$
A)decrease by $4,250.
B)increase by $4,850.
C)increase by $13,250.
D)decrease by $4,150.

Quizplus · Accepted Answer

The new sales revenue would be $49,000 (3,500 units x $14). The new total variable expenses would be $15,750 (3,500 units x $4.50). The new contribution margin would be $33,250 ($49,000 - $15,750). The new fixed expenses would be $20,000 (double the original $10,000). The new net income would be $13,250 ($33,250 - $20,000). The increase in net income is $4,850 ($13,250 - $8,400).

Billings Company Has Developed the Following Budgeted Income Statement: the Company