Question

Birchfield Company reports the following operating results for the month of February: sales $816,000 (units 13,600); variable costs $440,640; and fixed costs $191,600. Management is considering the following independent courses of action to increase net income. 1. Increase selling price by 2.3% with no change in total variable costs or units sold. 2. Reduce variable costs to 50.20% of sales. Compute the net income to be earned under each alternative. (Round per unit calculations to 2 decimal places, e.g. 15.25 and final answers to 0 decimal places, e.g. 125.) Alternative #1 Alternative #2 Net Income $ $ Which course of action will produce the highest net income? will produce the highest net income.

Birchfield’s management is looking at longer-term solutions to improve net income. One of the options they have reviewed will increase fixed expenses by $29,800 while reducing variable expenses by $2.00 per unit. Management feels that with these changes the price of the product could be reduced by $1.00 per unit. The decrease in price will then result in an increase in unit sales of 5%. Compute the net income to be earned under this alternative. Do you recommend this option? Why or why not? (Round per unit calculations to 2 decimal places, e.g. 15.25 and final answers to 0 decimal places, e.g. 125.) Net Income $ This option is as it net income.

Answer 1

Computation of Net Income under each alternative

	Existing	Alternative 1	Alternative 2
Per Unit	Total	Per Unit	Total	Per Unit	Total
Sales (13,600 Units)	$60.00	$816,000	$61.38	$834,768	$60.00	$816,000
Less: Total Costs
Variable Costs	$32.40	$440,640	$32.40	$440,640	$30.12	$409,632
Fixed Costs		$191,600		$191,600		$191,600
Total Costs		$632,240		$632,240		$601,232
Net Income (Sales - Total Costs)		$183,760		$202,528		$214,768

Net Income

Alternative 1 = $202,528

Alternative 2 = $214,768

Alternative 2 will produce the highest net income

Calculation of Net Income under alternative long term solution

Per Unit	Total
Sales (13,600 Units + 5% increase = 14,280Units )	$59.00 (60- 1)	$842,520
Less: Total Costs
Variable Costs	$30.40 (32.40 – 2)	$434,112
Fixed Costs ($191,600 - 29,800)		$161,800
Total Costs		$595,912
Net Income (Sales - Total Costs)		$246,608

Yes, we recommend this option since the Net Income will highest under this option.

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