Question

Sunland Company reports the following operating results for the month of August: sales $382,500 (units 5,100), variable costs $259,000, and fixed costs $99,000. Management is considering the following independent courses of action to increase net income.

1. Increase selling price by 12% with no change in total variable costs or units sold.
2. Reduce variable costs to 65% of sales.
a. Compute the net income to be earned under each alternative.
b. Which course of action will produce the higher net income?

Answer 1

Sunland Company

Alternative 1 Alternative 2

a. Net income $70,400 $34,875

b. Alternative 1 (increasing selling price by 12% with no change in total variable costs or units sold) produces the higher net income.

Step-by-step explanation:

a) Data and Calculations:

August sales = $382,500

Sales units = 5,100

Unit selling price = $75 ($382,500/5,100)

Variable costs = $259,000

Unit variable cost = $50.78 ($259,000/5,100)

Fixed costs = $99,000

Increase in selling price = 12% = $84 ($75 * 1.12)

Reduction in variable costs = 65% of sales

Alternative 1 Alternative 2

Sales revenue $428,400 $382,500

Variable costs 259,000 248,625

Contribution margin $169,400 $133,875

Fixed costs 99,000 99,000

Net operating income $70,400 $34,875