Henderson Farms reports the following results for the month of November: Sales (

Question

Henderson Farms reports the following results for the month of November: Sales (10,000 units) $600,000 Variable costs 420,000 Contribution margin 180,000 Fixed costs 110,000 Net income $ 70,000 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. 2. Reduce variable costs to 63% of sales. 3. Reduce fixed costs by $30,000. Instructions If maximizing net income is the objective, which is the best course of action?

Explanation / Answer

1. Increase selling price by 10% with no change in total variable costs. Revised Inc Stt will be Sales 1.10*600,000 = 660,000 Less Var cost 420,000 -------------------------- Total Cont 240,000 Less FC 110,000 ----------------------- Net Income 130,000 2. Reduce variable costs to 63% of sales. Revised Inc Stt will be Sales 600,000 Less Var cost (63%) 378,000 -------------------------- Total Cont 222,000 Less FC 110,000 ----------------------- Net Income 112,000 3. Reduce fixed costs by $30,000 Revised Inc Stt will be Sales 600,000 Less Var cost 420,000 -------------------------- Total Cont 180,000 Less FC 80,000 ----------------------- Net Income 100,000 From above we see that Increasing Sales price by 10% gives max Net Inc of $130,000. hence this should be opted for

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