Question

Barnes Company reports the following operating results for the month of August: sales $300,000 (units 5,000); variable costs $217,000; and fixed costs $70,000. 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 selling price by 10% with no change in total variable costs or sales volume.
2. Reduce variable costs to 55% of sales.
3. Reduce fixed costs by $18,000.
Which course of action will produce the highest net income?

Answer 1

1. $43000

2.$65000

3. $31000

Alternative 2

Step-by-step explanation:

Computation for the net income to be earned by Increasing the selling price by 10% with no change in total variable costs or sales volume.

1. Calculation of net income :-

First step is to calculate the Current selling price

Current selling price = $300000/ 5000 units

Current selling price= $ 60 per unit

Second step is to calculate the New selling price

New selling price = $ 60 *110%

New selling price= $ 66 per unit

Now let calculate the net income

Sales (5000 units * $66 per unit) $330000

Less Variable costs ($217000)

Contribution Margin $113000

($330000-$217000)

Less Fixed costs ($70000)

Net income $43000

($113000-$70000)

2. Computation for the net income to be earned by Reducing variable costs to 55% of sales.

Sales (5000 units * $60 per unit) $300000

Less Variable costs (55% * $300000) $165000

Contribution Margin $135000

($300000-$165000)

Less Fixed costs($70000)

Net income $65000

($135,000-7000)

3.Computation for the net income to be earned if their is Reduce fixed costs by $18000.

Dr Sales (5000 units * $60 per unit) $300000

Less Variable costs ($217000)

Contribution Margin $83000

($300000-$217000)

Less Fixed costs $52,000

($70000 - $18000)

Net income $31000

($83,000-$52,000)

Based on the information given the course of action that will produce the highest net income is alternative 2 with the amount of $65,000