Question

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. Instructions Compute the net income to be earned under each alternative. Which course of action will produce the higher net income?

Answer 1

Answer:

The profit is higher when there is increase in sales price by 10% than when the Variable Cost is reduced to 55% of sales.

Explanation:

Sales price per unit = (400,000 / 5,000)

Sales price per unit = $80

Sales (5000 x 80) =         400000

Less Variable Cost           240000

Contribution Margin         160000

Less; Fixed Cost               90000

Profit                                 70,000

Management Consideration 1

When we Increase price by 10%

Increase selling price = 80 + 10/100 * 80

=$68

Sales (5000 x 68) =         440000

Less Variable Cost           240000

Contribution Margin         200000

Less; Fixed Cost               90000

Profit                                 110,000

Management Consideration 2

When Variable Cost is reduced to 55% of sales

New Variable cost = 80 * 55/100

=$44

Sales (5000 x 68) =                             400000

Less Variable Cost (44 * 5000)          220000

Contribution Margin                            180000

Less; Fixed Cost                                   90000

Profit                                                   900,000

Conclusion

The profit is higher when there is increase in sales price by 10% than when the Variable Cost is reduced to 55% of sales.