Englehart, Inc. reports the following operating results for the month of August:

Question

Englehart, Inc. reports the following operating results for the month of August: Sales $300,000 (units 5,000); variable costs $210,000; and fixed costs $70,000. Management is considering the following independent courses of action to increase net income. 1. Increase selling price by 5% with no change in total variable costs. 2. Reduce variable costs to 67% of sales. 3. Reduce fixed costs by $10,000. Instructions Compute the net income to be earned under each alternative. Which course of action will produce the highest net income?

Explanation / Answer

1.Increase selling price by 5% with no change in total variable costs. Revised Inc Stt will be Sales 1.05*300,000 = 315,000 Less Var cost 210,000 -------------------------- Total Cont 105,000 Less FC 70,000 ----------------------- Net Income 35,000 2. Reduce variable costs to 67% of sales. Revised Inc Stt will be Sales 300,000 Less Var cost (67%) $201,000 -------------------------- Total Cont $99,000 Less FC 70,000 ----------------------- Net Income $29,000 3. Reduce fixed costs by $10,000 Revised Inc Stt will be Sales 300,000 Less Var cost 210,000 -------------------------- Total Cont 90,000 Less FC 60,000 ----------------------- Net Income 30,000 From above we see that Increasing Sales price by 5% gives max Net Inc of $35,000. hence this should be opted for

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