Question

Barnes Company reports the following operating results for the month of August: sales $300,000 (units 5,000); variable costs $214,000; and fixed costs $71,800. 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 $Enter the net income in dollars 2. Reduce variable costs to 55% of sales. Net income $Enter the net income in dollars 3. Reduce fixed costs by $23,000. Net income $Enter the net income in dollars Which course of action will produce the highest net income? Select an option

Answer 1

$14,200

$44,200

$63,200

$37,200

Explanation:

As per the data given in the question,

Presentation of profitability Statement

Particulars Amount Per unit

Sales $300,000 $60 ($300,000÷5,000)

Less: Variable cost $214,000

Contribution $86,000

Less: Fixed cost $71,800

Net income $14,200

Alternative 1 : increase selling price by 10%

Presentation of profitability Statement

Particulars Amount

Sales ($60+10% of $60) × 5,000 $330,000

Less: Variable cost $214,000

Contribution $116,000

Less: Fixed cost $71,800

Net income $44,200

Alternative 2 : reduce variable cost to 55% sales

Presentation of profitability Statement

Particulars Amount

Sales $300,000

Less: Variable cost(300,000×55%) $165,000

Contribution $135,000

Less: Fixed cost $71,800

Net income $63,200

Alternative 3 : reduce fixed cost by 23,000

Presentation of profitability Statement

Particulars Amount

Sales $300,000

Less: Variable cost $214,000

Contribution $86,000

Less: Fixed cost($71,800-$23,000) $48,800

Net income $37,200

Therefore alternative 2 produced highest net income.