Exercise 2212 Yams Company reports the following operating r

Exercise 22-12 Yams Company reports the following operating results for the month of August: sales $387,100 (units 4,900), variable costs $254,000, and fixed costs $91,000. Management is considering the following independent courses of action to increase net income 1. Increase selling price by 15% with no change in total variable costs or units sold. 2. Reduce variable costs to 68% of sales. Compute the net income to be earned under each alternative. (Round intermediate calculations to 2 decimal places e.g. 2.25 and final answer to O decimal places, e.g. 12,125.) 1. Net Income 2. Net Income which course of action will produce the higher net income

Solution

Seling price (387100/4900) 79.00 Less: Variable cost (254000/4900) 51.84 Contribution margin per unit 27.16 Alternative-1 Revised selling price (79+15%) 90.85 less: Variable cost per unit 51.84 Contribution amrgin per unit 39.01 Contribution earned (4900*39.01) 191,149 Less: Fixed cost 91,000 Net income 100,149 Alternative-2 Variable cost ratio shall be 68% Contribution margin ratio will be 32% CM per unit: 79 *32% = 25.28 Contribution margin earned (4900*25.28) 123872 Less: fixed cost 91000 Contribution earned 32872 Alternative-1 will produce higher income