CMA Study Group

Hi Vikesh, in regards to why the answer for this question is "B", we need to first calculate net income before the proposed changes.  Revenue is $1,748,000 (46,000 units sold at a price of $38 per unit).  Subtract variable costs of $966,000 (46,000 units sold at a price of $21 per unit) and fixed costs of $749,000 (given in the scenario).  Net income before the proposed changes is $33,000 ($1,748,000-$966,000-$749,000).  Now let's address how the proposed changes would affect net income.  The scenario states "Management estimates this option will increase sales 10%."  Our original revenue is $1,748,000.  By increasing sales by 10%, our new revenue will be $1,922,800 ($1,748,000*1.10).  Also, with the increase in revenue, our units sold will increase (sales price per unit remains the same).  We need the new amount of units sold to calculate the commission the three sales staff employees will receive under the proposal.  The new amount of units sold under the proposal will be 50,600.  This can be calculated one of two ways (46,000 units sold*1.10 or the new revenue amount of $1,922,800/$38 per unit).  Because sales will increase by 10%, variable costs will increase 10%.  Thus, the variable costs under the proposal are $1,062,600 ($966,000*1.10).  The scenario states that the three sales staff employees annual salary is included in fixed costs.  Their current salaries of $55,000 will be reduced to $25,000 (a fixed cost reduction of $90,000 - ($55,000-$25,000=$30,000*3)).  The fixed costs under the proposal are now $659,000 ($749,000-$90,000).  The last thing we need to address is the $2 commission for each unit sold.  The new amount of units sold is 50,600 (stated earlier in the explanation).  The commission amount will be $101,200 (50,600*$2).  Beginning with the revenue under the proposal and deducting all of the expenses gives us net income of $100,000 ($1,922,800-$1,062,600-$659,000-$101,200).  "B" is the correct choice because under the proposal net income will increase by $67,000 ($100,000-$33,000).  Hope this helps and good luck in your studies!

Lori Klay