Question

Coronado Company reports the following operating results for the month of August: sales $310,000 (units 5,000); variable costs $223,000; and fixed costs $70,800. 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 58% of sales. Net income $enter a net income if the variable costs are reduced to 58% of sales 3. Reduce fixed costs by $20,000. Net income $enter a net income if the fixed costs are reduced by $20,000 Which course of action will produce the highest net income? select an alternative with the highest net income

Answer 1

(1) -- Increase selling price by 10% with no change in total variable costs or sales volume.

Answer -

	Particulars	Explanation	Amount ($)
I.	Sales	$310000 + 10%	341000
II.	Variable costs	Given in question	223000
III.	Contribution margin	I - II	118000
IV.	Fixed costs	Given in question	70800
Net income		III - IV	47200

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(2) -- Reduce variable costs to 58% of sales.

Answer -

	Particulars	Explanation	Amount ($)
I.	Sales	Given in question	310000
II.	Variable costs	$310000 * 58%	179800
III.	Contribution margin	I - II	130200
IV.	Fixed costs	Given in question	70800
Net income		III - IV	59400

.

(3) -- Reduce fixed costs by $20000.

Answer -

	Particulars	Explanation	Amount ($)
I.	Sales	Given in question	310000
II.	Variable costs	Given in question	223000
III.	Contribution margin	I - II	87000
IV.	Fixed costs	$70800 - $20000	50800
Net income		III - IV	36200

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Which course of action will produce the highest net income?

Answer -

Reduce variable costs to 58% of sales will produce the highest net income of $59400.