Question

Barnes Company reports the following operating results for the month of August: sales $300,000 (units 5,000); variable costs $222,000; 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. What's the Net income?
2. Reduce variable costs to 60% of sales. Whats the Net income?
3. Reduce fixed costs by $19,000. Whats's the Net income?
Which course of action will produce the highest net income?

Answer 1

Answer:

Option 2 ( Net Income 48100)

Explanation:

The current Net income is,

Sales - Variable Cost - Fixed Cost = Net Income

• 300000 - 222000 - 71900 = 6100

• While the Selling Price is 300000 / 5000 = 60 / unit

1. If option one is implemented,

• New Selling Price = 60 * 1.1 = 66 / Unit

• Sales Revenue = 66 * 5000 = 330000
• Net Income = 330000 - 222000 - 71900 = 36100

2. New Variable Cost = 60 % of Sales = 300000 * 0.6 = 180000

• Net Income = 300000 - 180000 - 71900 = 48100

3. New Fixed Cost will be = 71900 - 19000 = 52900

• Net Income = 300000 - 52900 - 222000 = 25100