Norton company reports the following operating results for the month of August:

Question

Norton company reports the following operating results for the month of August: sales $310,000 (units 5,000); variable costs $210,000; and fixed costs $75,000. Management is considering the following independent courses of action to increase net income. 1) increase selling price by 10% with no change in total variable costs or sales volume, 2) reduce variable costs to 58% of sales, 3) reduce fixed costs by $20,000.

instructions
compute the net income to be earned under each alternative. which course of action will produce the highest net income?

Explanation / Answer

Contribution Format Stt:- No Of units sold 5000 Total pu cost Sales $310,000 =310,000/5000 = 62 Less VC ($210,000) =210,000/5000 = 42 ------------------------------------------------- Total COnt $100,000 $20 Less FC ($75000) --------------------------------- Net Income $25,000 .....................(A) Option 1: increase selling price by 10% with no change in total variable costs or sales volume So New SP pu = 1.10*$62 = $68.20 Cont pu = SP - VC = $68.20 - 42 = $26.20 pu Total Cont = 5000*$26.20 = $131,000 Less FC 75000 ----------------------- Net Income = $56,000 ..................(1) 2) reduce variable costs to 58% of sales So New VC = 58%*Old SP pu = 58%*62 = 36 So Cont pu = SP - VC = 62-36 = 26 Total Cont = 5000*$26 = $130,000 Less FC 75000 ----------------------- Net Income = $55,000 ..................(2) 3) reduce fixed costs by $20,000 We have Total Cont = 100,000 New FC = 75000-20000=55000 So Net Income = 100,000-55000 = 45000 ........(3) From above, we say that Option (1) is best which gives Net Inc of $56000

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