Question

Pharoah Company reports the following operating results for the month of August: sales $300,000 (units 5,000 ); variable costs $214,000; and fixed costs $71,800. Management is considering the following independent courses of action to increase net income.

Compute the net income to be earned under each alternative.
1. Increase unit selling price by 10% with no change in total variable costs or sales volume.
Net income $ ___
2. Reduce variable costs to 55% of sales.
Net income $ ___
3. Reduce fixed costs by $23,000.
Net income $ ___

Answer 1

The net income under the three alternatives would be $44,200 for increasing the selling price by 10%, $63,200 for reducing variable costs to 55% of sales, and $37,200 for reducing fixed costs by $23,000.

Step-by-step explanation:

The net income for the Pharoah Company under each alternative can be calculated as follows:

1. Increase unit selling price by 10%: New selling price per unit = $300,000 / 5,000 units * 110% = $66. New sales = 5,000 units * $66 = $330,000. Net income = $330,000 - $214,000 variable costs - $71,800 fixed costs = $44,200.
2. Reduce variable costs to 55% of sales: New variable costs = 55% of $300,000 = $165,000. Net income = $300,000 sales - $165,000 variable costs - $71,800 fixed costs = $63,200.
3. Reduce fixed costs by $23,000: New fixed costs = $71,800 - $23,000 = $48,800. Net income = $300,000 sales - $214,000 variable costs - $48,800 fixed costs = $37,200.