Reference no: EM132514566

Question - 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 are fixed costs:

Sales $2,000,000

Less: Cost of Goods sold 600,000

Gross Margin $1,400,000

Less: Operating expenses 500,000

Net Income $900,000

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

1. If Goodwin reduces the selling price by 10% and unit sales increase 10%, net income will:

A. increase

B. decrease

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

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