Question

Barnes Company reports the following operating results for the month of August: sales $300,000 (units 5,000); variable costs $214,000; and fixed costs $71,800. 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. Net income $Enter the net income in dollars 2. Reduce variable costs to 55% of sales. Net income $Enter the net income in dollars 3. Reduce fixed costs by $23,000. Net income $Enter the net income in dollars Which course of action will produce the highest net income? Select an option

Answer 1

Answer:

$14,200

$44,200

$63,200

$37,200

Explanation:

As per the data given in the question,

                    Presentation of profitability Statement

Particulars               Amount             Per unit

Sales                        $300,000               $60            ($300,000÷5,000)

Less: Variable cost $214,000

Contribution              $86,000

Less: Fixed cost $71,800

Net income             $14,200

Alternative 1 : increase selling price by 10%

Presentation of profitability Statement

Particulars                                                          Amount

Sales ($60+10% of $60) × 5,000                       $330,000

Less: Variable cost                                             $214,000

Contribution                                                      $116,000

Less: Fixed cost                                                $71,800

Net income                                                       $44,200

Alternative 2 : reduce variable cost to 55% sales

                          Presentation of profitability Statement

Particulars                                                           Amount

Sales                                                                     $300,000

Less: Variable cost(300,000×55%)                      $165,000

Contribution                                                         $135,000

Less: Fixed cost                                                    $71,800

Net income                                                            $63,200

Alternative 3 : reduce fixed cost by 23,000

                                   Presentation of profitability Statement

Particulars                                                                  Amount

Sales                                                                        $300,000

Less: Variable cost                                                 $214,000

Contribution                                                            $86,000

Less: Fixed cost($71,800-$23,000)                       $48,800

Net income                                                              $37,200

Therefore alternative 2 produced highest net income.