Question

Crane Company reports the following operating results for the month of August: sales $392,000 (units 4,900), variable costs $254,000, and fixed costs $91,000. Management is considering the following independent courses of action to increase net income. 1. Increase selling price by 15% with no change in total variable costs or units sold. 2. Reduce variable costs to 68% of sales. Compute the net income to be earned under each alternative.

Answer 1

1. Net operating income = $105,800

2. Net operating income = $34,440

Step-by-step explanation:

Requirement 1

If the selling price increases by 15%, the new sales price = $392,000 + ($392,000 × 15%) = $450,800

Crane Company

Contribution format income statement

for the year ended

Sales revenue = $450,800

Less: Variable expense = $254,000

Contribution margin = $196,800

Less: Fixed expense = $91,000

Net operating income = $105,800

Requirement 2

If variable cost reduced to 68% of sales, the new variable cost = $392,000 × 68% = $266,560

Crane Company

Contribution format income statement

for the year ended

Sales revenue = $392,000

Less: Variable expense = $266,560

Contribution margin = $125,440

Less: Fixed expense = $91,000

Net operating income = $34,440