Question

Barnes Company reports the following operating results for the month of August: sales $320,000 (units 5,000); variable costs $216,000; and fixed costs $70,500. 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 that will be earned under the first Alternative

2. Reduce variable costs to 56% of sales.

Net income

$enter the net income that will be earned under the second Alternative

3. Reduce fixed costs by $22,000.

Net income

$enter the net income that will be earned under the third Alternative

Which course of action will produce the highest net income? select an Alternative that will produce the highest net income Alternative 1Alternative 3Alternative 2

Answer 1

1.

Selling price increases by 10%

Therefore, New sales = $320,000 * 1.1

= $352,000

Net income = Sales - Variable cost - Fixed cost

= $352,000 - $216,000 - $ 70,500

= $65,500

2.

Variable costs to 56% of sales.

Variable cost = $320,000 * 0.56 = $179,200

Net income = Sales - Variable cost - Fixed cost

= $320,000 - $179,200 - $70,500

= $70,300

3.

Reduce fixed costs by $22,000.

New fixed cost = $70,500 - $22,000

= $48,500

Net income = Sales - Variable cost - Fixed cost

= $320,000 - $216,000 - $48,500

= $55,500

Alternate 2 produces highest net income.