Exercise 19-3 Barnes Company reports the following operating results for the mon
ID: 2414592 • Letter: E
Question
Exercise 19-3 Barnes Company reports the following operating results for the month of August: sales $315,000 (units 5,000); variable costs $213,000; and fixed costs $71,600 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 incomes 2. Reduce variable costs to 59% of sales. Net income 3. Reduce fixed costs by $24,000. Net income Which course of action will produce the highest net income?Explanation / Answer
Answer to Part 1:
Selling Price = Sales / Units Sold
Current Selling Price = 315,000 / 5,000 = $63
Expected Selling Price per unit = $63 + ($63 * 10%) = $69.30
Expected Sales = 5,000 * $69.30
Expected Sales = $346,500
Net Income = Sales – Variable Cost – Fixed Cost
Net Income = $346,500 - $213,000 - $71,600
Net Income = $61,900
Answer to Part 2:
Current Sales = $315,000
Expected Variable Cost Ratio = 59% of Sales
Expected Variable Cost = 59% of $315,000
Expected Variable Cost = $185,850
Net Income = Sales – Variable Cost – Fixed Cost
Net Income = $315,000 - $185,850 - $71,600
Net Income = $57,550
Answer to Part 3:
Current Fixed Cost = $71,600
Expected Fixed Cost = $71,600 - $24,000 = $47,600
Net Income = Sales – Variable Cost – Fixed Cost
Net Income = $315,000 - $213,000 - $47,600
Net Income = $54,400
Increase in Selling Price by 10% would produce highest Net Income.
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