Question

Bonita Company reports the following operating results for the month of August: sales $ 320,000 (units 5,000); variable costs $ 216,000; and fixed costs $ 70,500. 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 $ enter a net income if the selling price is increased by 10% 2. Reduce variable costs to 56% of sales. Net income $ enter a net income if the variable costs are reduced to 56% of sales 3. Reduce fixed costs by $ 22,000. Net income $ enter a net income if the fixed costs are reduced by $22,000 Which course of action will produce the highest net income? select an alternative with the highest net income

Answer 1

The course of action to choose is Alternative 2, which reduces the variable costs to 56% of sales and produces the highest net income.

Data and Calculations:

Description          Units   Per Unit    Total

Sales                  5,000      $64     $320,000

Variable costs   5,000      $43.2   $216,000

Fixed costs                                      $70,500

Alternative 1:

Selling price = $70.4 ($64 x 1.1)

Sales revenue = $352,000 (5,000 x $70.40)

Alternative 2:

Variable costs = $179,200 ($320,000 x 56%)

Variable cost per unit = $35.84 ($179,200/5,000)

Alternative 3:

Fixed costs = $48,500 ($70,500 - $22,000)

                       Alternative 1   Alternative 2   Alternative 3

Sales                  $352,000      $320,000        $320,000

Variable costs   $216,000        $179,200         $216,000

Fixed costs         $70,500         $70,500           $48,500

Total costs       $286,500       $249,700         $264,500

Net income       $65,500        $70,300           $55,500

Thus, Alternative 2 will generate a net income of $70,300, which is higher than the net incomes under Alternatives 1 and 3.

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