Question

Sandhill Company reports the following operating results for the month of August: sales $300,000 (units 5.000 ): variable costs $223,000; and fixed costs $70,800. Management is considering the following independent cour ses 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 56% of sales. Net income
3. Reduce fixed costs by $18,000. Net income Which course of action will produce the highest net income?

Answer 1

To calculate the net income under each alternative, we need to consider the impact on sales, variable costs, and fixed costs. Alternative 1 involves increasing the unit selling price by 10%, Alternative 2 involves reducing variable costs to 56% of sales, and Alternative 3 involves reducing fixed costs by $18,000. By comparing the net incomes under each alternative, we can determine which course of action will produce the highest net income.

Step-by-step explanation:

To calculate the net income under each alternative, we need to consider the different courses of action and their impact on sales, variable costs, and fixed costs.

1. Alternative 1: Increasing the unit selling price by 10% would result in a new selling price of $79.20 (72 x 1.10). Since there is no change in variable costs or sales volume, the net income would be:

Net Income = (Selling Price x Sales Volume) - Variable Costs - Fixed Costs
Net Income = ($79.20 x 5,000) - $223,000 - $70,800

1. Alternative 2: Reducing variable costs to 56% of sales would result in a new variable cost of $168,800 ($300,000 x 0.56). The net income would be:

Net Income = (Selling Price x Sales Volume) - Variable Costs - Fixed Costs
Net Income = ($72 x 5,000) - $168,800 - $70,800

1. Alternative 3: Reducing fixed costs by $18,000 would result in new fixed costs of $52,800 ($70,800 - $18,000). The net income would be:

Net Income = (Selling Price x Sales Volume) - Variable Costs - Fixed Costs
Net Income = ($72 x 5,000) - $223,000 - $52,800

By comparing the net incomes under each alternative, we can determine which course of action would produce the highest net income.