Question

E6-3 Barnes Company reports the following operating results for the month of August: sales Compute net income under different alternatives (units 5,000): variable costs $210,000; and fixed costs $75,000. M $325,000 independent courses of action to increase net income. anagement is considering the following Increase selling price by 10% with no change in total variable costs or sales volume. Reduce variable costs to 58% of sales 2 3 Instructions Compute the net income to be earned under each alternative. Which Reduce fixed costs by $15,000. course of action will produce the highest net income? mber in cells requesting a value; enter either a number or a formula in cells with a"?" Increase selling price by 10% with no change in total variable costs or sales volume. 2 Current selling price New selling price Round to nearest cent) Total sales Less: variable costs Contribution margin Less: fixed costs Net income Value Reduce variable costs to 58% of sales Total Sales Less: variable costs Contribution margin Less: fixed costs 2. Value Value Value

Answer 1

Ans.	Current situation :
		Total	Per unit
	Sales	325000	65
	Less: variable expenses	210000	42
	Contribution margin	115000	23
	Less: Fixed expenses	75000
	Net income	40000
	*Selling price per unit = Total sales / No. of units sold
		325000 / 5000   =    $65 per unit
	*Variable cost per unit = Total variable cost / No. of units sold
		210000 / 5000    =   $42 per unit
	E6 - 3
Ans. 1	New selling price =   65 * 110%	71.5
		Total	Per unit
	Sales (5000*71.5)	357500	71.5
	Less: variable expenses	210000	42
	Contribution margin	147500	29.5
	Less: Fixed expenses	75000
	Net income	72500
Ans.2	New variable cost = 325000 * 58%   =     188500
		Total	Per unit
	Sales	325000	65
	Less: variable expenses	188500	37.7
	Contribution margin	136500	27.3
	Less: Fixed expenses	75000
	Net income	61500
Ans.3	New fixed cost = (75000 - 15000) = 60000
		Total	Per unit
	Sales	325000	65
	Less: variable expenses	210000	42
	Contribution margin	115000	23
	Less: Fixed expenses	60000
	Net income	55000
*	The first course of action (Ans.1) will provide the highest net income.
	*Additional questions:
Ans. 1	New selling price =   65 * 105%	68.25
		Total	Per unit
	Sales (5000*71.5)	341250	68.25
	Less: variable expenses	210000	42
	Contribution margin	131250	26.25
	Less: Fixed expenses	75000
	Net income	56250
Ans.2	New variable cost = 325000 * 53%   =     172250
		Total	Per unit
	Sales	325000	65
	Less: variable expenses	172250	34.45
	Contribution margin	152750	30.55
	Less: Fixed expenses	75000
	Net income	77750
Ans.3	New fixed cost = (75000 + 20000) = 95000
		Total	Per unit
	Sales	325000	65
	Less: variable expenses	210000	42
	Contribution margin	115000	23
	Less: Fixed expenses	95000
	Net income	20000
*	The second course of action (Ans.2) will provide the highest net income.