Asked by Estefania Carlos on May 19, 2024
Verified
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\begin{array} { l r } \text { Sales (10,000 units) } & \$ 600,000 \\\text { Variable costs } & 420,000 \\\text { Contribution margin } & 180,000 \\\text { Fixed costs } & 110,000 \\\text { Net income } & \$ 70,000\end{array} Sales (10,000 units) Variable costs Contribution margin Fixed costs Net income $600,000420,000180,000110,000$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 66 
% of sales.
3. Reduce fixed costs by $10000.
Instructions
If maximizing net income is the objective which is the best course of action?
Net Income
The total earnings of a company after subtracting all expenses, including taxes, interest, and operating expenses, from its total revenue.
Selling Price
The amount for which a product or service is sold to customers, determined by factors like cost, market demand, and competition.
Fixed Costs
Charges that persist unchanged with fluctuations in production or sales activities, such as leasing costs, employee salaries, and insurance fees.
- Scrutinize the impact of changes in the financial structure and sales totals on a company's revenue.
- Evaluate the financial effects of distinct business decisions, such as altering prices and undertaking cost-cutting measures.
Verified Answer
TJ
Trevon JohnsonMay 22, 2024
Final Answer :
1. Current selling price is: $600000 ÷ 10000 units = $60
Increase $60 by 5%: $60 × 1.05 = $63 Revised sales $630,000 Variable costs 420,000 Contribution margin 210,000 Fixed costs 110,000 Net income $100,000\begin{array}{lr}\text { Revised sales } & \$ 630,000 \\\text { Variable costs } & 420,000 \\\text { Contribution margin } & 210,000 \\\text { Fixed costs } & 110,000 \\\text { Net income } & \$ 100,000\end{array} Revised sales Variable costs Contribution margin Fixed costs Net income $630,000420,000210,000110,000$100,000
2. Sales $600,000 Variable costs (reduce variable costs to 66%% of sales) 400,000 Contribution margin 200,000 Fixed costs 110,000 Net income $90,000\begin{array}{ll}\text { Sales } & \$ 600,000 \\\text { Variable costs (reduce variable costs to } 66 \% \% \text { of sales) } & 400,000 \\\text { Contribution margin } & 200,000 \\\text { Fixed costs } & 110,000 \\\text { Net income } & \$ 90,000\end{array} Sales Variable costs (reduce variable costs to 66%% of sales) Contribution margin Fixed costs Net income $600,000400,000200,000110,000$90,000
3.
Sales $600,000 Variable costs 420,000 Contribution margin 180,000 Fixed costs (reduce fixed costs by $10,000)100,000 Net income $80,000\begin{array}{lr}\text { Sales } & \$ 600,000 \\\text { Variable costs } & 420,000 \\\text { Contribution margin } & 180,000 \\\text { Fixed costs (reduce fixed costs by } \$ 10,000) & 100,000 \\\text { Net income } & \$ 80,000\end{array} Sales Variable costs Contribution margin Fixed costs (reduce fixed costs by $10,000) Net income $600,000420,000180,000100,000$80,000 Increasing the price will increase net income from $70000 to $100000. Option (2) will increase net income to only $90000 and Option (3) will increase net income to only $80000.
Increase $60 by 5%: $60 × 1.05 = $63 Revised sales $630,000 Variable costs 420,000 Contribution margin 210,000 Fixed costs 110,000 Net income $100,000\begin{array}{lr}\text { Revised sales } & \$ 630,000 \\\text { Variable costs } & 420,000 \\\text { Contribution margin } & 210,000 \\\text { Fixed costs } & 110,000 \\\text { Net income } & \$ 100,000\end{array} Revised sales Variable costs Contribution margin Fixed costs Net income $630,000420,000210,000110,000$100,000
2. Sales $600,000 Variable costs (reduce variable costs to 66%% of sales) 400,000 Contribution margin 200,000 Fixed costs 110,000 Net income $90,000\begin{array}{ll}\text { Sales } & \$ 600,000 \\\text { Variable costs (reduce variable costs to } 66 \% \% \text { of sales) } & 400,000 \\\text { Contribution margin } & 200,000 \\\text { Fixed costs } & 110,000 \\\text { Net income } & \$ 90,000\end{array} Sales Variable costs (reduce variable costs to 66%% of sales) Contribution margin Fixed costs Net income $600,000400,000200,000110,000$90,000
3.
Sales $600,000 Variable costs 420,000 Contribution margin 180,000 Fixed costs (reduce fixed costs by $10,000)100,000 Net income $80,000\begin{array}{lr}\text { Sales } & \$ 600,000 \\\text { Variable costs } & 420,000 \\\text { Contribution margin } & 180,000 \\\text { Fixed costs (reduce fixed costs by } \$ 10,000) & 100,000 \\\text { Net income } & \$ 80,000\end{array} Sales Variable costs Contribution margin Fixed costs (reduce fixed costs by $10,000) Net income $600,000420,000180,000100,000$80,000 Increasing the price will increase net income from $70000 to $100000. Option (2) will increase net income to only $90000 and Option (3) will increase net income to only $80000.
Learning Objectives
- Scrutinize the impact of changes in the financial structure and sales totals on a company's revenue.
- Evaluate the financial effects of distinct business decisions, such as altering prices and undertaking cost-cutting measures.