Question

Yams Company reports the following operating results for the month of August: sales $400,000 (units 5,000), variable costs $240,000, and fixed costs $90,000. Management is considering the following independent courses of action to increase net income.

1. Increase selling price by 10% with no change in total variable costs or units sold.
2. Reduce variable costs to 55% of sales.

Required:
Compute the net income to be earned under each alternative. Which course of action will produce the higher net income?

Answer 1

Yams Company

Alternative 1: Increasing the selling price by 10% with no change in total variable costs or units sold will produce the higher net income.

Step-by-step explanation:

a) Data and Calculations:

Total Unit Quantity

Sales for the month of August = $400,000 $80 5,000

Variable costs = $240,000 48 5,000

Fixed costs = $90,000

Alternatives to increase net income:

Alternative 1 Alternative 2

Sales revenue $440,000 $400,000

Variable costs 240,000 220,000

Contribution margin $200,000 $180,000

Fixed Costs 90,000 90,000

Net income $110,000 $90,000