Exercise 11-15 Flounder Company reports the following operating results for the

Question

Exercise 11-15 Flounder Company reports the following operating results for the month of August: sales $387,600 (units 5,100), variable costs $259,000, and fixed costs $99,000. Management is considering the following independent courses of action to increase net income. 1. Increase selling price by 14% with no change in total variable costs or units sold 2, Reduce variable costs to 65% 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 answer to 0 decimal places, e.g. 12,125.) 1. Net Income 2. Net Income Which course of action will produce the higher net income?

Explanation / Answer

1. Increase selling price by 14% with no change in total variable costs or sales volume. Sales ($387,600 x 1.14) $441,864 Less:Variable Cost -$259,000 Contribution Margin $182,864 Less: Fixed Cost -$99,000 Net Income $83,864 2.Reduce variable costs to 65% of sales. Sales $387,600 Less:Variable Cost ($387,600 x 65%) -$251,940 Contribution Margin $135,660 Less: Fixed Cost -$99,000 Net Income $36,660 Option 1 Increase selling price by 14% will increase net income

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