Barnes Company reports the following operating results for the month of August:

Question

Barnes Company reports the following operating results for the month of August: sales $315,000 (units 5,000): variable costs $219,000; 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. I. Increase selling price by 10% with no change in total variable costs or sales volume. Net income each 2. Reduce variable costs to 60% of sales. Net income 3. Reduce fixed costs by $20,000. Net income s Which course of action will produce the highest net income?

Explanation / Answer

1. Net Income = $ 55,900

2. Net Income = $ 54,400

3. Net Income = $ 44,400

The correct answer is Alternative 1

Notes :

a. Under Alternative 1 Sales Price = $ 315,000*110%

b. Under Alternative 2 Variable Cost = $ 315,000 * 60%

c. Under Alternative Fixed Cost = $ 71,600 - 20,000

d. Net Income Computations :

Existing Alternative 1 Alternative 2 Alternative 3 Sales 3,15,000 3,46,500 3,15,000 3,15,000 Less : Variable Costs 2,19,000 2,19,000 1,89,000 2,19,000 Contribution Margin 96,000 1,27,500 1,26,000 96,000 Less : Fixed Cost 71,600 71,600 71,600 51,600 Net Income 24,400 55,900 54,400 44,400

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