Exercise 18-15 Cottonwood Company reports the following operating results for th

Question

Exercise 18-15 Cottonwood Company reports the following operating results for the month of August: sales $344,400 (units 4,920); variable costs $220,000; and fixed costs $93,040. Management is considering the following independent courses of action to increase net income. 1. Increase selling price by 13% with no change in total variable costs or units sold. 2. Reduce variable costs to 56% 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 answers to o decimal places, e.g. 12,125.) 1. Net Income $ 2. Net Income $ Which course of action will produce the highest net income?

Explanation / Answer

Income is highest in alternative 2

Particulars Current Alternative 1 Alternative 2 Units 4920 4920 4920 Sellng Price 70 79.1 70 Variable Cost              44.72 44.72 39.2 Contribution              25.28 34.38 30.8 Total Contribution    124,400.00 169149.6 151536 Less: Fixed Cost 93040 93040 93040 Net Income      31,360.00        76,109.60        58,496.00

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