Erin Company reports the following operating results for the month of August: Sa

Question

Erin Company reports the following operating results for the month of August: Sales $406,800 (units 4,520); variable costs $188,700; and fixed costs $83,320. Management is considering the following independent courses of action to increase net income.

Increase selling price by 10% with no change in total variable costs.
Reduce variable costs to 65% of sales.
Reduce fixed costs by $14,130.

Compute the net income to be earned under each alternative.

1. $
2. $
3. $


Which course of action will produce the highest net income?

Explanation / Answer

1) increase selling price by 10 % per unit selling price = 406,800/4,520 = $ 90 per unit sales price is increased by 10 % then selling price =90(1+0.1) = $99 per unit sales =99*4520 = $447,480 total cost = $188,700 + $83,320 = $272,020 net income = sales -total cost = 447,480-272,020 = $ 175,460 (answer) 2) reduce variable cost to 65 % of the sale sale = $406,800 variable cost = 0.65*406,800 =$ 264,420 total cost =264,420 +83,320 = $347,740 net income = 406,800 -347,740 = $ 59,060 (answer) 3) here sales =$406,800 variable cost = $188,700 fixed cost =83,320 - 14,130 =$ 69,190 total cost = 188,700 +69,190 = $ 257,890 net income =406,800 -257,890 = $ 148,910 (answer)

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