Change in Sales Volume and Variable Costs on Net Income
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A company has provided the following data:
Sales 3,000 units
Sales price $70 per unit
Variable cost $50 per unit
Fixed cost $25,000
If the sales volume decreases by 25%, the variable cost per unit increases by 15%, and all other factors remain the same, net income will:
A) decrease by $31,875.
B) decrease by $15,000.
C) increase by $20,625.
D) decrease by $3,125.
Because fixed costs will remain the same regardless of changes in sales volume or variable costs per unit, we need not factor the fixed costs into our equation. Thus, the change in net income will be:
The new sales volume will be:
Old sales volume 3,000 units
Decrease in volume 750 units (3,000 units*.25)
New sales volume 2,250 units (3,000 units-750 units)
The new sales revenue will be:
This solution discusses and illustrates how to compute the effect of changes in sales volume and unit variable costs on net income.