Exercise 22-12 Yams Company reports the following operating results for the mont

Question

Exercise 22-12 Yams Company reports the following operating results for the month of August: sales $357,000 (units 5,100), variable costs $259,000, and fixed costs $99,000. Management is considering the following independent courses of action to increase net income 1. Increase selling price by 12% with no change in total variable costs or units sold 2. Reduce variable costs to 66% 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 Incme 2. Net Income which course of action will produce the higher net income? Alternative 1

Explanation / Answer

1. Sales Price Per Unit = $ 357,000 / 5,100 Units

= $ 70 Per Unit

Sales Price after Increase = $ 70*112%

= $ 78.40

Hence, Revised Sales = $ 78.40 *5100 Units

= $ 399,840

Less: Variable Cost = $ 259,000

Contribution Margin = $ 140,840

Less: Fixed Cost= $ 99,000

Net Income = $ 41,840

Hence the correct answer is $ 41,840

2. The correct answer is $ 22,380

Note :

Action 1 would produce the higher net income

Hence the correct answer is Alternative 1

Sales 357,000 Less: Variable expenses(66% * Sales) 235,620 Contribution margin 121,380 Less: Fixed expenses 99,000 operating income 22,380

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