Question

Exercise 19-03 Barnes Company reports the following operating results for the month of August: sales $315,000 (units 5,000); variable costs $224,000; and fixed costs $71,900. 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 Which course of action will produce the highest net income? Click if you would like to show Work for this question: Open Show Work SUBMIT ANSWER Question Attempts: Unlimited SAVE FOR LATER

Answer 1

Given Facts : Particulars Amount ($) Sales (5,000 Units) $ 3,15,000 Less : Variable Costs $ 2,24,000 Contribution $ 91,000 Less : Fixed Costs $ 71,900 Net Income $ 19,100 Alternative 1. Sales Price increase by 110% without increase in units / variable costs. Particulars Amount ($) Sales (5,000 Units) $ 3,46,500 Less : Variable Costs $ 2,24,000 Contribution $ 1,22,500 Less : Fixed Costs $ 71,900 Net Income $ 50,600 Alternative 2. Reducing the Variable costs to 60% of Sales. Alternative 3. Reducing the Fixed Costs by $ 20,000. Particulars Amount ($) Sales (5,000 Units) $ 3,15,000 Less : Variable Costs $ 1,89,000 Contribution $ 1,26,000 Less : Fixed Costs $ 71,900 Net Income $ 54,100 Particulars Amount ($) Sales (5,000 Units) $ 3,15,000 Less : Variable costs $ 2,24,000 Contribution $ 91,000 Less : Fixed Costs $ 51,900 Net Income $ 39,100 Conclusion : The alternative 2 will produce the highest Net Income.