Exercise 19-3 Barnes Company reports the following operating results for the mon

Question

Exercise 19-3 Barnes Company reports the following operating results for the month of August: sales $325,000 (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. 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 income 2. Reduce variable costs to 58% of sales Net income 3. Reduce fixed costs by $15,000. Net income Alternative 1 Which course of action will produce the highest net income?

Explanation / Answer

Answer:-

Hence alternative 1 (ie- increase in selling price by 10%) produce a higher net income compare to others.

Explanation:-Selling price per unit =$325000/5000 units =$65 per unit

Increase in selling price by 10% =$65 per unit*110% =$71.5 per unit

Barnes Company Computation of Net Income earned under each alternative Particulars Alternative 1 Alternative 2 Alternative 3 $ $ $ Sales $71.5 per unit*5000 units = 357500 325000 325000 Less:- Variable costs 210000 325000*58% =188500 210000 Contribution 147500 136500 115000 Less:- Fixed costs 75000 75000 75000-15000=60000 Net Income 72500 61500 55000

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