Question

Exercise 19-03 Barnes Company reports the following operating results for the month of August: sales $325,000 (units 5,000); variable costs $218,000; and fixed costs $70,000. 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 $ 2. Reduce variable costs to 57% of sales. Net income 3. Reduce fixed costs by $22,000. Net income Which course of action will produce the highest net income?

Answer 1

		Total	PU
	Sale	3,25,000	65.00	100.0%
	Less: Variable Cost	2,18,000	43.60	67.1%
	Contribution Margin	1,07,000	21.40	32.9%
	Less: Fixed Cost	70,000
	Net Income	37,000
A	Existing Net Income	37,000
	Add: Sale Price Increase	32,500	(325000*10%)
	Revised Net Income	69,500
B	Existing Net Income	37,000
	Add: Savings in Variable Cost	32,750		New Variable Cost	1,85,250	(325000*57%)
	Revised Net Income	69,750		Less: Existing VC	2,18,000
				Saving in Cost	32,750
C	Existing Net Income	37,000
	Add: Savings in Fixed Cost	22,000
	Revised Net Income	59,000
	Option B