Question

Pharoah Company reports the following operating results for the month of August: sales $360,000 (units 4,800), variable costs $245,000, and fixed costs $92,000. Management is considering the following independent courses of action to increase net income. 1. Increase selling price by 12% with no change in total variable costs or units sold. 2. Reduce variable costs to 61% of sales. Compute the net income to be earned under each alternative.

Answer 1

Answer:

1. Net Income = $66,200

2. Net Income = $91,600

Explanation:

Requirement 1

Original sales = $360,000

If we increase the sales by 12%,

The new sales = $360,000 + ($360,000 × 12%) = $403,200

                                     Pharoah Company        

                                     Income statement

Sales revenue =               $403,200

Less: Variable cost =      ($245,000)

Contribution margin =      $158,200

Less: fixed costs =            ($92,000)

Net income =                     $66,200

Note: The company increases the sales but does not change the costs.

Requirement 2

Original sales = $360,000

If we decrease the variable expense to 61% of sales,

The new variable expense = $360,000 × 61% = $219,600

                                     Pharoah Company        

                                     Income statement

Sales revenue =               $403,200

Less: Variable cost =      ($219,600)

Contribution margin =      $183,600

Less: fixed costs =            ($92,000)

Net income =                     $91,600

Note: The company reduces the variable costs but not changes sales or fixed costs.