Cottonwood Company reports the following operating results for the month of Augu

Question

Cottonwood Company reports the following operating results for the month of August: sales $401,600 (units 5,020); variable costs $220,000; and fixed costs $96,790. Management is considering the following independent courses of action to increase net income. Increase selling price by 11% with no change in total variable costs or units sold. Reduce variable costs to 57% 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 answers to o decimal places, e.g. 12,125.) Which course of action will produce the highest net income?

Explanation / Answer

Calculation of Net income Particulars Alternative 1 Alternative 2 Sales                445,776                    401,600 Less: Variable Costs                220,000                    228,912 Contribution                225,776                    172,688 Less: Fixed Costs                  96,790                      96,790 Net Income                128,986                      75,898 Alternative 1. Sales = $401600 + (401600 X 11%) = $445776 Alternative 2. Variable Costs = $401600 X 57% = $228912 Under Alternative 1, The Net Income = $128986 is highest.

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