Asked by Camay Bhakoo on Jun 20, 2024
Verified
Englehart Inc. reports the following operating results for the month of August: Sales $450000 (units 5000); variable costs $280000; and fixed costs $115000. 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 65% of sales.
3. Reduce fixed costs by $15000.
Instructions
Compute the net income to be earned under each alternative. Which course of action will produce the highest net income?
Net Income
The amount of profit left after all operating expenses, taxes, and other costs have been subtracted from total revenue.
Variable Costs
Financial outlays that adjust based on the level of a firm's activity.
Selling Price
The amount a customer pays to purchase a product or service.
- Discover tactics for securing target profit margins by controlling sales activities, expenses, and pricing frameworks.
- Analyze the impact of changes in cost structures on profitability.
Verified Answer
SK
Sandeep kaur SidhuJun 25, 2024
Final Answer :
(1) Unit sales price = $450000 /5000 units = $90
Increase selling price to $99 or ($90 * 110%).
Net income = $495000 - $280000 - $115000 = $100000.
(2) Reduce variable costs to 65% of sales.
Net income = $450000 - $292500 - $115000 = $42500.
(3) Reduce fixed costs to $100000 or ($115000 - $15000).
Net income = $450000 - $280000 - $100000 = $70000.
Alternative 1 increasing selling price will produce the highest net income.
Increase selling price to $99 or ($90 * 110%).
Net income = $495000 - $280000 - $115000 = $100000.
(2) Reduce variable costs to 65% of sales.
Net income = $450000 - $292500 - $115000 = $42500.
(3) Reduce fixed costs to $100000 or ($115000 - $15000).
Net income = $450000 - $280000 - $100000 = $70000.
Alternative 1 increasing selling price will produce the highest net income.
Learning Objectives
- Discover tactics for securing target profit margins by controlling sales activities, expenses, and pricing frameworks.
- Analyze the impact of changes in cost structures on profitability.