Ger Company Reports The Following Operating Results
Ger Company Reports The Following Operating Results For The Month Of A
Ger Company reports the following operating results for the month of August: Sales of $300,000 generated from 5,000 units, with variable costs totaling $210,000 and fixed costs of $70,000. Management is considering three independent actions to increase net income: (1) increasing the selling price by 10% with no change in total variable costs; (2) reducing variable costs to 58% of sales; and (3) reducing fixed costs by $20,000. The task is to compute the net income that would result from each of these actions independently.
Paper For Above instruction
Introduction
Understanding how different management actions influence a company's profitability is crucial for strategic decision-making. In this paper, we analyze the impact of three independent options that Ger Company considers to enhance its net income. We will compute the projected net income after each action, assuming the other variables remain constant, and interpret the implications of each strategy.
Current Operating Results Analysis
Ger Company's current financial performance for August includes sales of $300,000 from selling 5,000 units, which indicates an average selling price of $60 per unit. The total variable costs are $210,000, translating to a variable cost per unit of $42. Additionally, fixed costs amount to $70,000. The current net income can be calculated as follows:
Net Income = Sales - Variable Costs - Fixed Costs
Net Income = $300,000 - $210,000 - $70,000 = $20,000
This baseline provides a reference point for evaluating the proposed actions.
1. Increasing the Selling Price by 10%
By raising the selling price by 10%, the new price per unit becomes:
New price per unit = $60 × 1.10 = $66
Since the total sales are still based on 5,000 units, the new total sales revenue is:
Total sales = 5,000 units × $66 = $330,000
Variable costs remain unchanged at $210,000, as per the assumption, which suggests variable cost per unit stays at $42. The fixed costs also remain unchanged at $70,000. Therefore, the new net income is:
Net Income = New Sales - Variable Costs - Fixed Costs
Net Income = $330,000 - $210,000 - $70,000 = $50,000
Resultantly, increasing the selling price by 10% significantly improves net income, from $20,000 to $50,000, highlighting the effectiveness of price strategies when costs remain stable.
2. Reducing Variable Costs to 58% of Sales
This strategy involves decreasing the variable costs to 58% of sales revenue. The current sales are $300,000, so the new variable costs will be:
Variable costs = 58% × $300,000 = $174,000
Fixed costs are assumed unchanged at $70,000. The total sales revenue remains at $300,000, and net income becomes:
Net Income = Sales - Variable Costs - Fixed Costs
Net Income = $300,000 - $174,000 - $70,000 = $56,000
This approach yields an increase in net income compared to current results, emphasizing the benefit of cost control and efficiency improvements in variable expenses.
3. Reducing Fixed Costs by $20,000
By cutting fixed costs by $20,000, the new fixed costs are:
New fixed costs = $70,000 - $20,000 = $50,000
Assuming sales and variable costs remain unchanged at $300,000 and $210,000, respectively, the net income after cost reduction is:
Net Income = Sales - Variable Costs - New Fixed Costs
Net Income = $300,000 - $210,000 - $50,000 = $40,000
This measure improves net income but is less impactful than the first two strategies in the context of the current data.
Conclusion
In conclusion, all three strategies—raising prices, reducing variable costs, and lowering fixed costs—positively influence net income individually. The most profitable outcome arises from increasing the selling price by 10%, leading to a net income of $50,000. Cost reduction strategies, particularly lowering fixed costs, also offer notable improvement but require different managerial considerations, such as market acceptance and operational efficiencies. Managers should evaluate these options based on their feasibility and potential impact on market competitiveness.
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