Question

Barnes Company reports the following operating results for the month of August: sales $320,000 (units 5,000); variable costs $216,000; and fixed costs $70,500. 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. Net income $ 2. Reduce variable costs to 56% of sales. Net income $ 3. Reduce fixed costs by $22,000. Net income $ Which course of action will produce the highest net income

Answer 1

Step-by-step explanation:

Selling price per unit = $300000 / 5000 units = $60 per unit

Increase in selling price by 10% = $60 + $60*10% = $60 + $6 = $66

1. Sales (5000 units * $66) $330000

less: variable expenses ($222000)

Contribution margin $108000

less: fixed cost ($71900)

Net income = $36100

2. If variable cost is reduced to 60% of sales

Sales $300000

less: variable cost (reduce 60%) ($180000)

Contribution margin $120000

less: fixed cost ($71900)

Net income = $48100

3. If fixed cost is reduced to $19000

Sales $300000

less: variable cost ($222000)

Contribution margin $78000

less: fixed cost (reduce by $19000) ($52900)

Net income = $25100

Actual net income is $6100 ( sales $300000 - variable cost $222000 - Fixed cost $71900)

Case 1 : increasing the price will lead to an increase in the net income from $6100 to $36100

Case 2 : Reducing the variable cost will lead to an increase in the net income from $6100 to $48100

Case 3 : Reducing the fixed cost will lead to an increase in the net income from $6100 to $25100.