Question

Bramble Company reports the following operating results for the month of August: sales $325,000 (units 5,000); variable costs $212,000; and fixed costs $70,400. 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

$enter a net income if the selling price is increased by 10%

2. Reduce variable costs to 60% of sales.

Net income

$enter a net income if the variable costs are reduced to 60% of sales

3. Reduce fixed costs by $18,000.

Net income

$enter a net income if the fixed costs are reduced by $18,000

Which course of action will produce the highest net income?

-Alternative 1, 2 or 3   

Answer 1

	Total	Per unit
Sales (5,000 units)	325,000	65
Variable cost	212,000	42.40
Contribution margin	113,000	22.60
Fixed costs	70,400
Net income	42,600

1.

Increase selling price by 10%

Selling price = $65

New selling price = 65 + 65 x 10%

= $71.5

	Total	Per unit
Sales (5,000 units)	357,500	71.5
Variable cost	212,000	42.40
Contribution margin	145,500	29.10
Fixed costs	70,400
Net income	75,100

2.

Variable costs reduce by 10%

Variable costs = $42.40

New variable cost = $42.40 - 42.40 x 10%

= $38.16

	Total	Per unit
Sales (5,000 units)	325,000	65
Variable cost	190,800	38.16
Contribution margin	134,200	26.84
Fixed costs	70,400
Net income	63,800

3.

Fixed costs reduce by 18,000

Fixed cost = $70,400

New fixed cost = 70,400-18,000

= $52,400

	Total	Per unit
Sales (5,000 units)	325,000	65
Variable cost	212,000	42.40
Contribution margin	113,000	22.60
Fixed costs	52,400
Net income	60,600

Alternative 1 course of action will produce the highest net income.

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