Question

Question 8

Oriole Company reports the following operating results for the month of August: sales $378,000 (units 5,400), variable costs $255,000, and fixed costs $93,000. 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 63% of sales.

Compute the net income to be earned under each alternative.

1.		Net Income		$
2.		Net Income		$

Which course of action will produce the higher net income?

Alternative 1Alternative2

Answer 1

	Alternative 1	Alternative 2
Sales	$415,800	$378,000
Variable cost	($255,000)	($238,140)
Contribution margin	$160,800	$139,860
Fixed cost	($93,000)	($93,000)
Net income	$67,800	$46,860

1. Net income $67,800

2. Net income $46,860

Alternative 1 will produce the higher net income.