Question

Desert Rat Farms reports the following results for the month of October:

Sales (50,000 units)                                              $1,750,000

Variable Cost                                                             $1,225,000

Contribution Margin                                           $1,525,000

Fixed Cost                                                                   $800,000

Net Income                                                                $725,000

Management is considering the following independent courses of action to increase net income (*independent+ start w/ original #’s for each consideration)

A. Increase selling price by 20% w/ no change to variable cost.

B. Reduce variable cost to 62% of sales

C. Reduce fixed cost by $100,000

Show what the net income would be for each A, B and C. Which is the best course of action to increase net income.

Answer 1

Solution:

Net Income under each option would be

	Option A	Option B	Option C
	Increase selling price by 20% w/ no change to variable cost	Reduce variable cost to 62% of sales	Reduce fixed cost by $100,000
Sales (50,000 units)	$2,100,000	$1,750,000	$1,750,000
Variable Cost	$1,225,000	$1,085,000	$1,225,000
Contribution Margin	$875,000	$665,000	$525,000
Fixed Cost	$800,000	$800,000	$700,000
Net Income	$75,000	-$135,000	-$175,000

The best course of action to increase net income is Option A

Note – I have given the answer based on these 3 options.

Note – In the data provided the contribution margin is wrong. The correct contribution margin would be $525,000 and there would be a Net Loss of $275,000

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you