hi, I tried to answer this exercise question but can't figure it out.

Question: Company’s sales volume increase 30% next year, what is the net income increase by.

Given:
Sales 4,000 units
Sales price $60 per unit
Variable cost $18 per unit
Fixed costs $42,000

My income statement:
Sales 240,000
Variable Exp 72,000
CM 168,000
Fixed 42,000 (given)
Net income 126,000

Here is what I did so far,
I did 4,000 units x 1.30 = 5,200 units (with the new units I just recreated the net income)

5,200 x $60 = 312,000
5,200 x $18 = 93,600
CM = 219,600
Fixed = 42,000
Net Inc = 177, 600

JUST HAVE A LOOK AT THESE CORRECTED FIGURES:-

5,200 x $60 = 312,000
5,200 x $18 = 93,600
CM = 218,400
Fixed = 42,000
Net Inc = 176,400

Watch out for your arithmetic.

The correct answer is: 50400

To get it,

Expected CM - Present CM

(312k x .7) - (240k x .7)

218,400 - 168,000 = 50400

Quote:

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Originally Posted by ROLCAM

JUST HAVE A LOOK AT THESE CORRECTED FIGURES:-

5,200 x $60 = 312,000
5,200 x $18 = 93,600
CM = 218,400
Fixed = 42,000
Net Inc = 176,400

Watch out for your arithmetic.

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Thanks for pointing that out.. I was reading off my paper..

I think you missed the fact that the problem asked for the increase in net income, not the new new income.

Using the contribution margin is just a shortcut. CM is what actually causes changes to net income as long as fixed doesn't become involved. So you can shortcut it by figuring the CM times increase in units.

You can also work it out the way you did, but your math was incorrect.

Don't get too hung up in their equations. Try to understand what they mean, and pay close attention to instructions. There was nothing wrong with the way you did it if that works for you, if you make sure you answer what they're asking.

Quote:

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Originally Posted by morgaine300

I think you missed the fact that the problem asked for the increase in net income, not the new new income.

Using the contribution margin is just a shortcut. CM is what actually causes changes to net income as long as fixed doesn't become involved. So you can shortcut it by figuring the CM times increase in units.

You can also work it out the way you did, but your math was incorrect.

Don't get too hung up in their equations. Try to understand what they mean, and pay close attention to instructions. There was nothing wrong with the way you did it if that works for you, if you make sure you answer what they're asking.

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I thank the Lord for all you smart math tutors out there!! You help us struggling students (even the older set like myself who is 50+ yrs!) Thank you!! =)