Question

Cullumber Company reports the following operating results for the month of August: sales $382,500 (units 5,100), variable costs $247,000, and fixed costs $96,000. Management is considering the following independent courses of action to increase net income.

1.		Increase selling price by 12% with no change in total variable costs or units sold.
2.		Reduce variable costs to 57% of sales.

Compute the net income to be earned under each alternative.

1.		Net Income		$enter a dollar amount
2.		Net Income		$enter a dollar amount

Answer 1

Answer 1)

Calculation of Net Income

Net Income = Sales – Variable costs – fixed costs

                      = $ 428,400 - $ 247,000 - $ 96,000

                      = $ 85,400

Therefore the net income is $ 85,400

Working Note:

Calculation of Current selling price per unit:

Current Selling price per unit = Total Sales/ number of units sold

                                                     = $ 382,500/ 5,100 units

                                                     = $ 75 per unit

Calculation of Increased selling price per unit:

Increased Selling price per unit = Current selling price + (current selling price X 12%)

                                                         = $ 75 + ($ 75 X 12%)

                                                        = $ 84 per unit

Calculation of Sales with increase in selling price by 12%

Sales = Number of units sold X increased selling price per unit

           = 5,100 units X $ 84 per unit

          = $ 428,400

Answer 2)

Calculation of Net Income

Net Income = Sales – Variable costs – fixed costs

                      = $ 382,500 - $ 218,025 - $ 96,000

                      = $ 68,475

Therefore the net income is $ 68,475

Working Note:

Calculation of variable costs:

Variable costs = Sales X 57%

                           = $ 382,500 X 57%

                           = $ 218,025