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Sheffield Company reports the following operating results for the month of August: sales $315,000 (units 5,000); variable costs $216,000; and fixed costs $70,800. Management is considering the following independent courses of action to increase net income. Compute the net income to be earned under each alternative. 1. Increase selling price by 10% with no change in total variable costs or sales volume.

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Answer:

1. the net income if selling price increased by 10% would be = $59,700

Net income increased by $31,500.

Explanation:

Given,

Sales = $315,000

Variable costs = $216,000

Fixed costs = $70,800

No. of units = 5,000

                                   Sheffield Company

             Income Statement (Contribution Margin Format)

Particulars                                                $

Sales                                                    315,000

Less: Variable expenses                   (216,000)

Contribution Margin                             99,000

Less: Fixed costs                                (70,800)

Net Income                                          28,200

Since the selling price increased by 10% and no change in variable costs and volume, therefore, we can get -

Sales = $315,000 x (1 + 0.10) = $346,500

In this case, the net income will be as follows:

Sales                          = $346,500

Less: Variable Costs =  (216,000)

Contribution Margin  =   130,500

Less: Fixed Costs      =   (70,800)

Net Income                =   59,700

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