Question

Exercise 18-15

Yams Company reports the following operating results for the month of August: sales $390,000 (units 5,000), variable costs $256,000, and fixed costs $91,000. Management is considering the following independent courses of action to increase net income.

1. Increase selling price by 14% with no change in total variable costs or units sold.
2. Reduce variable costs to 57% of sales.

Compute the net income to be earned under each alternative. (Round intermediate calculations to 2 decimal places e.g. 2.25 and final answer to 0 decimal places, e.g. 12,125.)

1. Net Income
$
2. Net Income
$

Which course of action will produce the higher net income?

Alternative 1
Alternative 2

Answer 1

• All working forms part of the answer
• Requirement 1: Net Income under both the alternatives

Alternative #1
Increase Selling price per unit
A	Current Sales	$390,000
B	Current units sold	5,000
C = A/B	Current sales price per unit	$                      78.00
D	Increase in sale price %	14%
E = CxD	Increase in sale price per unit	$                      10.92
F = C+E	New Sale price per unit	$                      88.92
G = B x F	Total Sales revenue in Alternative #1	$444,600
H	Variable Cost	$256,000
I = G - H	Contribution margin	$188,600
J	Fixed Cost	$91,000
K = I - J	Net Income	$97,600

Alternative #2
Reduce variable Cost
Sales	$390,000
Variable Cost [390000 x 57%]	$222,300
Contribution margin	$167,700
Fixed Cost	$91,000
Net Income	$76,700

• Requirement 2

Correct Answer: Alternative #1 WILL GIVE HIGHER NET INCOME.