Question

Barnes Company reports the following operating results for the month of August: sales $300,000 (units 5,000); variable costs $217,000; and fixed costs $70,000. 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 incomes 2. Reduce variable costs to 55% of sales. Net income $ 3. Reduce fixed costs by $18,000. Net income Which course of action will produce the highest net income?

Answer 1

Solution :- 1. Calculation of net income :-

Increase selling price by 10% with no change in total variable costs or sales volume .

Current selling price = $300000/ 5000 units = $ 60 per unit

New selling price = $ 60 *110% = $ 66 per unit

Particulars	Amount
Sales (5000 units * $66 per unit)	$330000
Less : Variable costs	$217000
Contribution Margin	$113000
Less :Fixed costs	$70000
Net income	$43000

2. Reduce variable costs to 55% of sales.

Particulars	Amount
Sales (5000 units * $60 per unit)	$300000
Less : Variable costs (55% * $300000)	$165000
Contribution Margin	$135000
Less :Fixed costs	$70000
Net income	$65000

3. Reduce fixed costs by $18000.

Particulars	Amount
Sales (5000 units * $60 per unit)	$300000
Less : Variable costs	$217000
Contribution Margin	$83000
Less :Fixed costs ($70000 - $18000)	$52000
Net income	$31000

Alternative 2 : By reducing variable costs to 55% of sales will produce the highest income of $ 65000.