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alex41 [277]
2 years ago
12

Sunland Company reports the following operating results for the month of August: sales $382,500 (units 5,100), variable costs $2

59,000, and fixed costs $99,000. 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 65% of sales.
a. Compute the net income to be earned under each alternative.
b. Which course of action will produce the higher net income?
Business
1 answer:
Aleksandr [31]2 years ago
4 0

Answer:

Sunland Company

                                        Alternative 1        Alternative 2

a. Net income                      $70,400                $34,875

b. Alternative 1 (increasing selling price by 12% with no change in total variable costs or units sold) produces the higher net income.

Explanation:

a) Data and Calculations:

August sales = $382,500

Sales units = 5,100

Unit selling price = $75 ($382,500/5,100)

Variable costs = $259,000

Unit variable cost = $50.78 ($259,000/5,100)

Fixed costs = $99,000

Increase in selling price = 12% = $84 ($75 * 1.12)

Reduction in variable costs = 65% of sales

                                        Alternative 1        Alternative 2

Sales revenue                  $428,400            $382,500

Variable costs                    259,000              248,625

Contribution margin        $169,400              $133,875

Fixed costs                          99,000                 99,000

Net operating income      $70,400                $34,875

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Debt                            $8,400,000            27.71%             4.389 %      1.22%

Common stock           $24,190,000           71.17%              12.2%         8.68%

Preferred stock           $1,400,000              4.12%               3.5%         0.14%

Total                          $ 33,990,000          100.00%                            10.04%

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Cost of Debt = interest × (1 - tax rate)

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Cost of Common stock = Risk free Rate + Beta × Market Premium

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The increase in cash recorded from the statement of cash flows prepared in the year plus the opening balance of cash at the beginning of the year gives the cash balance at the end of the year shown below:

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