Exercise 19-3 Barnes Company reports the following operating results for the mon
ID: 2562307 • Letter: E
Question
Exercise 19-3 Barnes Company reports the following operating results for the month of August: sales $300,000 (units 5,000); variable costs $217,000; and fixed costs $70,000. 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 55% of sales. Net income 3. Reduce fixed costs by $18,000. Net income which course of action will produce the highest net incomeExplanation / Answer
Present Situation
Particulars
Amount
Per Unit
Sales (5000 Units)
300000
60
Less: Variable Cost
217000
43.4
Contribution Margin
83000
16.6
Less: Fixed Costs
70000
Net Profit
13000
Alternative 1
Selling Price Per Unit [(60*110%)
66
Less: Variable Cost Per Unit
43.4
Contribution Margin per Unit
22.6
Number of Units
5000
Total Contribution Margin
113000
Less: Fixed Costs
70000
Net Profit
43000
Alternative 2
Particulars
Amount
Sales (5000 Units)
300000
Less: Variable Cost (55% * 300000)
165000
Contribution Margin
135000
Less: Fixed Costs
70000
Net Profit
65000
Alternative 3
Particulars
Amount
Sales (5000 Units)
300000
Less: Variable Cost
217000
Contribution Margin
83000
Less: Fixed Costs (70000 - 18000)
52000
Net Profit
31000
Alternative 2 i.e., Reduce variable costs to 55% of sales will produce highest net income
Present Situation
Particulars
Amount
Per Unit
Sales (5000 Units)
300000
60
Less: Variable Cost
217000
43.4
Contribution Margin
83000
16.6
Less: Fixed Costs
70000
Net Profit
13000
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