Question

Zeta Inc. currently sells 10,000 model Y TV's that have a sales price of $400 and variable coasts of $240 each. The company has fixed costs of $900,000.

a. What is Zeta Inc.'s income from model Y TV's?

b. By how much would income change under each of the following independent proposed changes? Should the change be made?

If higher quality of materials are used for special features, the sales price will increase to $430, variable costs to $270 adn the number of units sold will decrease by 10%

Robots will be introduced into the production line. Variable costs per unit will decrease by $60 and fixed costs will increase to $1,200,000.

Answer 1

Answers

• All working forms part of the answer
• Answer ‘a’

	Units	per Unit	Amount
Sales	10000	$               400.00	$ 40,00,000.00
(-) Variable cost	10000	$               240.00	$ 24,00,000.00
Contribution margin	10000	$               160.00	$ 16,00,000.00
(-) Fixed Cost			$    9,00,000.00
Net Income			$    7,00,000.00

• Answer ‘b’

Proposal 1

	Units	per Unit	Amount
Sales	9000	$               430.00	$ 38,70,000.00
(-) Variable cost	9000	$               270.00	$ 24,30,000.00
Contribution margin	9000	$               160.00	$ 14,40,000.00
(-) Fixed Cost			$    9,00,000.00
Net Income			$    5,40,000.00
Earlier Net Income was			$    7,00,000.00
Increase (Decrease) in Net Income			$ (1,60,000.00)

Since the proposed net income will decrease, Proposal 1 should not be accepted.

Proposal 2

	Units	per Unit	Amount
Sales	10000	$               400.00	$ 40,00,000.00
(-) Variable cost	10000	$               180.00	$ 18,00,000.00
Contribution margin	10000	$               220.00	$ 22,00,000.00
(-) Fixed Cost			$ 12,00,000.00
Net Income			$ 10,00,000.00
Earlier Net Income was			$    7,00,000.00
Increase (Decrease) in Net Income			$    3,00,000.00

Since, the proposed net income will increase to $10,00,000, This proposal SHOULD be accepted.