Question

Question 10

Vaughn Company reports the following operating results for the month of August: sales $315,000 (units 5,000); variable costs $219,000; and fixed costs $71,600. 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 60% of sales.

Net income

$

3. Reduce fixed costs by $20,000.

Net income

$

Answer 1

Net Income under each alternative is as calculated below:

		Alternative 1	Alternative 2	Alternative 3
	Amount ($)	Amount ($)	Amount ($)	Amount ($)
Sales	315,000	346500	315,000	315,000
Variable Costs	219,000	219,000	189000	219,000
Contribution Margin	96,000	127,500	126,000	96,000
Fixed Costs	71,600	71,600	71,600	51600
Net Operating Income	24,400	55,900	54,400	44,400