Question

Goodwin estimates that 80% of Cost of Goods Sold is variable costs, and 80% of Operating expenses is fixed costs. $2,000,000 Sales Less: Cost of goods sold 600,000 Gross margin $1,400,000 Less: Operating expenses 500,000 Net income S900.000 Goodwin is considering lowering the sales price in order to increase sales. Management believes that if it reduces the selling price by 10%, then sales (in units) will increase 10% 8. If Goodwin reduces the selling price by 10% and unit sales increase 10%, net income will a. Increase b. Decrease 9. Refer to the previous question. What is the amount of the increase or decrease in net income? 10. Assume Goodwin reduces the selling price by 10%. How many units would Goodwin have to sell to earn the same TOTAL contribution margin prior to the reduction in the selling price?

Presented below is the income statement of Goodwin Inc. The income statement is based on sales of 100,000 units at $20 per unit.

Goodwin estimates that 80% of Cost of Goods Sold is variable costs, and 80% of Operating expenses is fixed costs.

Goodwin is considering lowering the sales price in order to increase sales. Management believes that if it reduces the selling price by 10%, then sales (in units) will increase 10%.

8.If Goodwin reduces the selling price by 10% and unit sales increase 10%, net income will:
a.Increase
b.Decrease

9.Refer to the previous question. What is the amount of the increase or decrease in net income?

10.Assume Goodwin reduces the selling price by 10%. How many units would Goodwin have to sell to earn the same TOTAL contribution margin prior to the reduction in the selling price?

Answer 1

Contribution Margin Income Statement
	Current	New
Sales	2,000,000	1,980,000
Less: variable cost
Cost of goods sold	480,000	528,000
Operating Expenses	100,000	110,000
Contribution Margin	1,420,000	1,342,000
Less: Fixed costs
Cost of goods sold	120,000	120,000
Operating Expenses	400,000	400,000
Net Income	900,000	822,000
8.b. Decrease
9.Amount of decrease = $78,000
10.Divide Desired contribution amrgin by the contribution margin per unit to get desired sales units
Selling price per unit will be required to calculate this