Question

Englehart, Inc. reports the following operating results for the month of August: Sales $450,000 (units 5,000); variable costs $280,000; and fixed costs $115,000. 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. 2. Reduce variable costs to 60% of sales. 3. Reduce fixed costs by $15,000. Compute the net income to be earned under each alternative.

Answer 1

Answer:

(1)  net income 72,000

(2) net income 65,000

(3) net income 70,000

Explanation:

sales 450,000 - 280,000 = 170,000 contribution

contribution / sales = CMR = .37777777 = 17/45

(1)

Δincrease in sales x CMR = Δoperating income

10% of 450,000 x 17/45 = Δoperating income

17,000 = Δoperating income

previous t income + Δoperating income = new net income

55,000 + 17,000 = 72,000

(2)

varible cost = 60% of sales

then CMR= sales - 60% of sales = 40%

Sales x CMR - fixed cost = net income

450,000 x .4 - 115,000 =  65,000

(3)

↓fixed cost = 15,000

previous t income + ↓fixed cost = new net income

55,000 + 15,000 = 70,000