Question

The following data is related to sales and production for Blue sky company for last year.

Selling price per unit $140

Variable manufacturing costs per unit $62

Variable selling and administrative expenses per unit $6

Fixed manufacturing overhead (in total) $32,000

Fixed selling and administrative expenses (in total) $6000

Units produced during the year 2000

Units sold during year 900

a) Using variable costing, what is the operating income for last year?

b) Management is considering the following courses of actions to increase net income:

1) Increase selling price by 15% with no change in variable costs.

2) Decrease variable costs to 40% of sales.

3) Decrease fixed manufacturing costs by 28000.

If the management is aiming to maximize the net income, which one is the best course of action? Present all of your calculations.

Answer 1

a) Calculate operating income :

Sales (900*140)		126000
Variable cost of goods sold (900*62)		55800
Manufacturing margin		70200
Variable selling and administrative (900*6)		5400
Contribution margin		64800
FIxed cost
Fixed manufacturing overhead	32000
Fixed selling and administrative expenses	6000
Total fixed cost		38000
Operating income		26800

b) Management is considering the following courses of actions to increase net income:

	a)	b)	c)
Sales	900*161 = 144900	900*140 = 126000	126000
Variable cost of goods sold	900*62 = 55800	126000*40% = 50400	55800
Manufacturing margin	89100	75600	70200
Variable selling and administrative	900*6 = 5400	5400	5400
Contribution margin	83700	70200	64800
FIxed cost
Fixed manufacturing overhead	32000	32000	4000
Fixed selling and administrative expenses	60000	6000	6000
Total fixed cost	38000	38000	10000
Operating income	45700	32200	54800

So answer is c) Fixed manufacturing cost decrease by 28000 is best course of action