Question

CALCULATOR PRINTER VERSION 4 BACK Exercise 5-15 Your answer is partially correct. Try again. 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. 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. 1. Net Income 2. Net Income Alternative 1 Which course of action will produce the higher net income? Click if you would like to Show Work for this question: Open Show Work

Answer 1

Alternative 1:

Increase selling price by 10%

Particulars	$
Sales (5,000 Units * $88 per unit)	440,000
Less: Variable cost	240,000
Contribution Margin	200,000
Less: Fixed Cost	90,000
Net Income	110,000

Working Note:

Selling price = $400,000 / 5,000 Units = $80 per unit.

Selling price after increment = $80 + 10% = $88 per unit.

Alternative 2:

Reduce variable cost to 55% of sales

Particulars	$
Sales	400,000
Less: Variable cost ($400,000 * 55%)	220,000
Contribution Margin	180,000
Less: Fixed Cost	90,000
Net Income	90,000

Alternative 1 will produce the higher net income.

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