Question

Barnes Company reports the following operating results for the month of August: sales $305,000 (units 5,000); variable costs $213,000; and fixed costs $71,700. Management is considering the following independent courses of action to increase net income. Compute the net income to be earned under each alternative1. Increase selling price by 10% with no change in total variable costs or sales volume. Net income ş______2. Reduce variable costs to 60% of sales. Net income.______3. Reduce fixed costs by $22,000. Net income s__________Which course of action will produce the highest net income?

Answer 1

1. $30,500;

2. $30,000;

3. $22,000;

=> Option 1 produce the highest net income.

Step-by-step explanation:

We have sell price per unit = 305K /5K = $61

1. Increase selling price by 10% with no change in total variable costs or sales volume:

Sell price = 61 x 1.1 = $67.1

Sales revenue = 67.1 x 5,000 = $335,500

Increase in sales revenue = 335.5K - 305K = $30,500

As costs remains the same, Net income will increase as much as the increase as sales revenue which is $30,500.

2. Reduce variable costs to 60% of sales:

New variable cost = $305,000 x 60% = $183,000

Saving in variable cost = 213K - 183K = $30,000

As fixed cost and sales revenue remain the same, net income will increase as much as the saving in variable cost which is $30,000

3. Reduce fixed costs by $22,000:

As variable cost and sales revenue remain the same, net income will increase as much as the saving in fixed cost which is $22,000