Exercise 20-3 Barnes Company reports the following operating results for the mon
ID: 2578907 • Letter: E
Question
Exercise 20-3 Barnes Company reports the following operating results for the month of August: sales 310,000 (units 5,000); variable costs $214,000; and fixed costs $71,000. 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 $L 2. Reduce variable costs to 57% of sales. Net income s 3. Reduce fixed costs by $24,000. Net income $ Which course of action will produce the highest net income?Explanation / Answer
1. Increase selling price by 10% with no change in total variable costs.
Solution: 57,000
Working: Unit sales price = $310,000 / 5,000 units = $62
selling price to $68.20, or ($62 *110%).
Net income = $341,000 - $214,000 - $71,000 = 57,000
2. Reduce variable costs to 57% of sales.
Solution: 62,300
Working: Variable expenses: 310,000 * 57% = $176,700
Net income = $310,000 - $176,700 - $71,000 = $62,300
3. Reduce fixed costs by $24,000
Solution: $49,000
Working: Fixed cost =$71,000 - $24,000 = $47,000
Net income = $310,000 - $214,000 - $47,000 = $49,000
PART-2) Reduce variable costs to 57% of sales will produce the highest net income
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