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11 May, 12:51

Yams Company reports the following operating results for the month of August: sales $400,000 (units 5,000), variable costs $240,000, and fixed costs $90,000. 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 or units sold. 2. Reduce variable costs to 55% of sales. Instructions Compute the net income to be earned under each alternative. Which course of action will produce the higher net income?

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  1. 11 May, 12:57
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    The profit is higher when there is increase in sales price by 10% than when the Variable Cost is reduced to 55% of sales.

    Explanation:

    Sales price per unit = (400,000 / 5,000)

    Sales price per unit = $80

    Sales (5000 x 80) = 400000

    Less Variable Cost 240000

    Contribution Margin 160000

    Less; Fixed Cost 90000

    Profit 70,000

    Management Consideration 1

    When we Increase price by 10%

    Increase selling price = 80 + 10/100 * 80

    =$68

    Sales (5000 x 68) = 440000

    Less Variable Cost 240000

    Contribution Margin 200000

    Less; Fixed Cost 90000

    Profit 110,000

    Management Consideration 2

    When Variable Cost is reduced to 55% of sales

    New Variable cost = 80 * 55/100

    =$44

    Sales (5000 x 68) = 400000

    Less Variable Cost (44 * 5000) 220000

    Contribution Margin 180000

    Less; Fixed Cost 90000

    Profit 900,000

    Conclusion

    The profit is higher when there is increase in sales price by 10% than when the Variable Cost is reduced to 55% of sales.
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