Question

Barnes Company reports the following operating results for the month of August: sales $300,000 (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

$

2. Reduce variable costs to 56% of sales.

Net income

$

3. Reduce fixed costs by $18,000.

Net income

$

Which course of action will produce the highest net income?

Alternative 1 // Alternative 2 // Alternative 3

Answer 1

Req 1		Total	Per Unit
	Sales	330,000	66
	Less: Variable cost	223,000	45
	Contribution margin	107,000	21
	Less: Fixed cost	70,800
	Net INCOME	36,200
Req 2		Total	Per Unit
	Sales	300,000	60
	Less: Variable cost	168,000	34
	Contribution margin	132,000	26
	Less: Fixed cost	70,800
	Net INCOME	61,200
Req 3		Total	Per Unit
	Sales	300,000	60
	Less: Variable cost	223,000	45
	Contribution margin	77,000	15
	Less: Fixed cost	52,800
	Net INCOME	24,200
	Alternative 2 will produce the highest net income