Question

Exercise 22-12 Yams Company reports the following operating results for the month of August: sales $400,000 (units 5,000), variable costs $240,000, and fixed costs $90,000. Management is considering the following independent courses of action to increase net income. 1. Increase selling price by 10% with no change in total variable costs or units sold. 2. Reduce variable costs to 55% 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?

Answer 1

This would be the formula:
Sales $400000 - VC $240000 = CM $160000 - FC $90000 = Net Income $70000

what would happen if the selling price goes up by 10% with no change in total variable costs.

$400000 x 10% = 40000
$400000 + $40000= $440000


Sales $440000 - VC $240000 = CM $200000 - FC $90000 = Net Income $110000

Thus, the net income to be earned by Increase the selling price 10% would be $110000

Now, by reducing the variable costs to 55% of sales you would get a net income:

Take 55% of sales to get the total variable cost:
$400000 x 55%= $220000


Sales $400000 - VC $220000 = CM $180000 - FC $90000 = N I $90000

By reducing the variable costs to 55% of sales you would get a net income of $90000