Question

5.15 (LO 5), AP Yams Company reports the following operating results for the month of August: sales $400,000 (units 5,000), variable costs $240,000, and fixed costs $90,000. 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 units sold. 2. Reduce variable costs to 55% of sales. Instructions Compute the net income to be earned under each alternative. Which course of action will produce the higher net income?

Answer 1

Ans:

	Alternative 1: Increase Selling Price by 10%
S.NO	Particulars	Amount
	Sales (5000*80*1.1)	$440,000
	Less: Variable Cost (5000*42)	$210,000
	Contribution Margin	$230,000
	Less: Fixed Cost	$90,000
	Net Income	$140,000

	Alternative 2: Reduce Variable cost to 55%
S.NO	Particulars	Amount
	Sales	$400,000
	Less: Variable Cost (400,000*55%)	$220,000
	Contribution Margin	$180,000
	Less: Fixed Cost	$90,000
	Net Income	$90,000

1.Alternative	Net Income	$140,000
2.Alternative	Net Income	$90,000

Hence,

Alternative 1, Produce higher Net Income