Question

Sunland Company reports the following operating results for the month of August: sales $300,000 (units 5,000); variable costs $223,000; and fixed costs $70,800. 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 a net income if the selling price is increased by 10% 2. Reduce variable costs to 56% of sales. Net income $enter a net income if the variable costs are reduced to 56% of sales 3. Reduce fixed costs by $18,000. Net income $enter a net income if the fixed costs are reduced by $18,000

Answer 1

Answer:

See below

Explanation:

Given selling price per unit = $300,000/5,000 units = $60

1. Increase selling price by 10% with no change in total variable costs or sales volume

Selling price = $60 × 1.1 = $66

Sales revenue = $66 × 5,000 units = $330,000

Increase in sales revenue = $330,000 - $300,000 = $30,000

Here, as costs remains the same, Net income will increase as much as the increase as sales revenue which is $30,000

2. Reduce variable cost to 56% of sales

New variable cost = $330,000 × 56% = $184,800

Saving in variable cost = $223,000 - $184,800 = $38,200

Here, as the fixed cost and sales revenue remains the same, net income will increase as much as the saving in variable cost which is $38,200

3. Reduce fixed cost by $18,000

As the variable cost and sales revenue remains the same, net income will increase as much as the savings in fixed cost which is $18,000