Question

6.3 (LO 1),AP Barnes Company reports the following operating results for the month of August: sales 000 (units 5,000); variable costs $210,000; and fixed costs $75,000. Management is considering the following independent courses of action to increase net income. I. Increase selling price by 10% with no change in total variable costs or sales volume, 2. Reduce variable costs to 58% of sales. 3. Reduce fixed costs by $15,000 Instructions Compute the net income to be earned under each alternative. Which course of action will produce the highest net income?

Answer 1

Answer

• All working forms part of the answer
• Net Income under each alternative

	Current	Alternative 1	Alternative 2	Alternative 3
Sales	$325,000	$357,500	$325,000	$325,000
Variable Cost	$210,000	$231,000	$188,500	$210,000
Contribution margin	$115,000	$126,500	$136,500	$115,000
Fixed Cost	$75,000	$75,000	$75,000	$60,000
Net Income	$40,000	$51,500	$61,500	$55,000

--Working for above

	Current	Alternative 1	Alternative 2	Alternative 3
Sales	325000	=325000 + (325000 x 10%)	325000	325000
Variable Cost	210000	=210000*357500/325000	=325000*58%	210000
Contribution margin	=325000-210000	=357500-231000	=325000-188500	=325000-210000
Fixed Cost	75000	75000	75000	=75000-15000
Net Income	=115000-75000	=126500-75000	=136500-75000	=115000-60000

• Highest Net Income would be in Alternative #2: reducing Variable cost to 58% of sales.