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Barnes Company reports the following operating results for the month of August: sales $300,000 (units 5,000); variable costs $217,000; and fixed costs $71,800. Management is considering the following independent courses of action to increase net income. Compute the net income to be earned under each alternative. 1. Increase selling price by 10% with no change in total variable costs or sales volume. Net income $Entry field with incorrect answer 2. Reduce variable costs to 56% of sales. Net income $Entry field with incorrect answer 3. Reduce fixed costs by $18,000. Net income $Entry field with incorrect answer

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Answer:

Presentation of profitability:

Contribution = Sales - variable cost

                     = $300,000 - $217,000

                     = $83,000

Net Income = Contribution - Fixed cost

                   = $83,000 - $71,800

                   = $ 11,200

Alternative 1: Increase selling price by 10%

Contribution = Sales - variable cost

                     = ($60 + $60×0.1)× 5,000 - $217,000

                     = $330,000 - $217,000

                     = $113,000

Net Income = Contribution - Fixed cost

                   = $113,000 - $71,800

                   = $ 41,200

Alternative 2: Reduce variable costs to 56% of sales.

Contribution = Sales - variable cost

                     = $300,000 - (0.56 × $300,000)

                     = $330,000 - $ 168,000

                     = $132,000

Net Income = Contribution - Fixed cost

                   = $132,000 - $71,800

                   = $60,200

Alternative 3: Reduce fixed costs by $18,000.

Contribution = Sales - variable cost

                     = $300,000 - $217,000

                     = $83,000

Net Income = Contribution - Fixed cost

                   = $83,000 - ($ 71,800 - $ 18,000)

                   = $83,000 - $ 53,800

                   =  $29,200