### Computing new net income if facilities costing is given

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A company located in Munich makes Christmas nutcrackers and has an annual plant capacity of 2,400 product units. Its predicted operating results (in German marks) for the year are the following:

Production and sales of 1,500 units, total sales DM 180,000

Manufacturing costs:
-Fixed (total) 90,000
-Variable (per unit) 31

Selling and administrative expenses:
-Fixed (total) 50,000
-Variable (per unit) 15

Compute the following, ignoring income taxes:

1. There is a special order of 400 units to be sold at DM 50 per unit. Compute the new net income. You can state your assumptions about what costs are relevant and irrelevant. There is no one correct set of assumptions.

2. Ignore the requirement regarding the special order in part 1. Now the company wants a target net income of 30,000 DM. It wants to understand how and if it can achieve it.

For each method, compute the following:

Compute the number of units the company must sell to make the targeted net income it desires. (Show calculations.)

Explain what would happen in this situation if the variable costs increased or decreased.

Explain what would happen in this situation if the fixed costs increased or decreased.

What would happen in this situation if the sell price increased by 10% and all of the other costs stayed the same? (Show calculations.)

Discuss the limitations; do not limit the computations to what you think.

3. Assume that capacity and sales can be doubled to 4,800 units. Again, compute the new net income if facilities costing 500,000DM are added at 5-year life.

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