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?

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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