Ex.3

ABC Company reports the following operating results for the month of November: sales OMR 900,000 (units 15,000); variable costs OMR 472,500; and fixed costs OMR 202,500. Management is considering the following independent courses of action to increase net income.

1. Increase selling price by 2.5% with no change in total variable costs or units sold.

2. Reduce variable costs to 49% of sales.

Instructions:

(a) Calculate the net income to be earned under each alternative. Which course of action will produce the highest net income?

(b) ABC's management is looking at longer-term solutions to improve net income. One of the options they have reviewed will increase fixed expenses by OMR 27,500 while reducing variable expenses by OMR 2 per unit. Management feels that with these changes the price of the product could be reduced by OMR 1 per unit. The decrease in price will then result in an increase in unit sales of 5%. Compute the net income to be earned under this alternative. Do you recommend this option? Why or why not?