Question

E6.3 (LO 1), AP Barnes Company reports the following operating results for the month of August: sales $325,000 (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. 1. 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

solution: 65 selling price per unit = 325000/5000 variable cost per unit = 210000/5000 Alternative 1: Increase selling price sales (5000*65*1.1) Less : Variable cost (5000*42) Contribution margin Less : fixed cost net income 357500 210000 147500 75000 72500 Alternative 2: Reduce variable cost sales Less : Variable cost (325000*58%) Contribution margin Less : fixed cost net income 325000 188500 136500 75000 61500 Alternative 3: Reduce fixed cost sales Less : Variable cost (5000*42) Contribution margin Less : fixed cost net income 325000 210000 115000 60000 55000 Alternative 1 results in higher net income.