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.(Round intermediate calculations to 2 decimal places, e.g. 2.25 and final answers to o decimal places, e.g. 12,125.) 1. Net Income 2. Net Income Which course of action will produce the highest net income.

Answer 1

Answer:

Net Income Op 1 = 72,000.000 (this will produce the highest net income)

Net Income Op 2= 66,000.000

Explanation:

1)

Keeping the quantity of units sold, but increasing the sales price by 10%, net income would be calculated as follows:

First, we calculate the sales:

Sales = 5000 units * 88 sale price ((400,000 / 5,000) * 1.1)

Sales = 440,000

Then we subtract from this value the variable costs and fixed costs, which are the same from the data:

Net income = sales - variable costs - fixed costs

Net income = 440,000 - 270,000 - 98,000

Net income = 72,000

2)

Reducing variable costs by 59% of sales, net income would be as follows;

First, we calculate the variable costs:

Variable costs = 400,000 * 0.59

Variable costs = 236,000

Net income = sales - variable costs - fixed costs

Net income = 400,000 - 236,000 - 98,000

Net income = 66,000