Question

Sandhill Company reports the following operating results for the month of August: sales $400,000 (units 5,000), variable costs $247,000, and fixed costs $98,000. 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 59% of sales. Compute the net income to be earned under each alternative.

Answer 1

Answer:

(1) $132,000

(2) $66,000

Explanation:

Selling price per unit:

= Sales ÷ No. of units

= $400,000 ÷ 5,000

= $80

Variable cost per unit:

= variable cost ÷ No. of units

= $247,000 ÷ 5,000

= $42

Alternative 1:

Contribution margin = Sales - variable cost

                                  = (5,000 × $80 × 1.1) - (5,000 × $42)

                                  = $440,000 - $210,000

                                  = $230,000

Net income = Contribution margin - Fixed cost

                   =  $230,000 - $98,000

                   = $132,000

Alternative 2:

Contribution margin:

= sales - variable cost

= $400,000 - ($400,000 × 59%)

= $400,000 - $236,000

= $164,000

Net income = Contribution margin - Fixed cost

                   =  $164,000 - $98,000

                   = $66,000