Question

Yams Company reports the following operating results for the month of August: sales $336,000 (units 4,800), variable costs $244,000, and fixed costs $91,000. Management is considering the following independent courses of action to increase net income. 1. Increase selling price by 10% with no change in total variable costs or units sold. 2. Reduce variable costs to 55% of sales. Compute the net income to be earned under each alternative. (Round intermediate calculations to 2 decimal places e.g. 2.25 and final answer to O decimal places, e.g. 12,125.) 1. Net Income $ 2. Net Income $ Which course of action will produce the higher net income?

Answer 1

1.

Selling price = (Total sales / units)

= ($336,000 / 4,800)

= $70

Selling price increase by 10%

= $70 + ($70*10%)

= $77

Sales ($77 * 4,800 units)	$369,600
(-) Variable cost	$244,000
Contribution margin	$125,600
(-) Fixed costs	$91,000
Net income	$34,600

2.

Variable costs = $336,000 * 55%

= $184,800

Sales	$336,000
(-) Variable cost	$184,800
Contribution margin	$151,200
(-) Fixed costs	$91,000
Net income	$60,200

Second course of action will produce the higher net income.