Question

3. (10 Points) A company is looking into two alternative methods of producing its product. The following information about the two alternatives is available. If the company's expected sales volume is 35,000 units, which alternative should be selected? Prepare forecasted income statements to assess the alternatives. Alternative#1 Alternative #2 $12 Variable costs per unit Fixed costs Selling price per unit $240,000 $20 $140,000 $20

Answer 1

B4 sales revenue D alternative#1 income statement sales revenue $ 700,000 less: variable costs $ 280,000 contribution margin $ 420,000 less: fixed costs $ 240,000 net income $ 180,000 alternative#2 income statement sales revenue $ 700,000 less: variable costs $ 420,000 contribution margin $ 280,000 less: fixed costs $ 140,000 net income $ 140,000 decision - the company should select alternative#1 reason - because alternative#1 is providing more net income when compared with alternative#2

for formulas and calculations, refer to the image below -

B4 X f sales revenue alternative#1 income statement sales revenue 1-35000*20 less: variable costs =35000*8 contribution margin =C4-C5 less: fixed costs =240000 net income =C6-C7 alternative#2 income statement sales revenue =35000*20 less: variable costs =35000*12 contribution margin=C12-C13 less: fixed costs =140000 net income =C14-C15 decision - the company should select alternative#1 reason - because alternative#1 is providing more net income when compared with alternative#2

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