Question

Hydra Inc. makes swimwear for professional athletes. Analysis of the firm’s financial records for the current year reveals the following:

Unit Swimsuit Selling Price	$78
Variable Swimsuit Costs
Direct Material	$30
Direct Labor	$16
Variable overhead	$8
Annual Fixed Costs
Manufacturing	$12,000
Selling and Administrative	$25,000

Answer each question independently.

4A)      Hydra is considering upgrading to faster sewing machines that will save $7 per swimsuit in variable costs for the entire production but will raise annual fixed cost by $47,500. If the existing equipment is upgraded, the company expects to make and sell an additional 6,500 swimsuits over its current sales of 10,000 units. If this investment is made, by how much will its income increase (decrease)?

4B)      A marketing consultant told Hydra managers that they could increase the number of swimsuits sold by 33% if the selling price was reduced by 20% and the company spent an extra $25,000 on advertising. The company has been selling 5,000 swimsuits. If this investment is made, by how much will its income increase (decrease)?

please show all work and equations

Answer 1

Q. 4A)	Increase / ( Decrease ) In come of Hydra Inc.
Particualrs	Existing Set up	Upgraded Setup
Qty.	10,000	10,000
Additiona Qty.		6,500
Total Qty. (A)	10,000	16,500
Selling Price	78	78
Selling Value (B)	7,80,000	12,87,000
Variable Cost
Dircet Material	30	30
"          Labour	16	16
Variable OH	8	8
Savings due to Upgard	-	-7
Per Unit (C)	54	47
Overall Variable Cost (A X C)	5,40,000	7,75,500
Contriubtion Margin (D)	2,40,000	5,11,500
Fixed cost
Manufacturing	12,000	12,000
Selling & Admin	25,000	25,000
Additional due to upgradation	-	47,500
Total Fixed Cost (E)	37,000	84,500
Profit (D-E)	2,03,000	4,27,000
Additiona profit due to upgradation	2,24,000

4B)	Increase / ( Decrease ) In come of Hydra Inc.
Particualrs	Existing Price	IF selling price reduce by 20%
Qty.	5,000	6,650
Additiona Qty.
Total Qty. (A)	5,000	6,650
Selling Price	78	62
Selling Value (B)	3,90,000	4,14,960
Variable Cost
Dircet Material	30	30
"          Labour	16	16
Variable OH	8	8
Savings due to Upgard	-	-
Per Unit (C)	54	54
Overall Variable Cost (A X C)	2,70,000	3,59,100
Contriubtion Margin (D)	1,20,000	55,860
Fixed cost
Manufacturing	12,000	12,000
Selling & Admin	25,000	25,000
Extra Advertising	-	25,000
Total Fixed Cost (E)	37,000	62,000
Profit (D-E)	83,000	-6,140
Additiona profit due to reduction in selling price	-89,140
Not worth reducing the selling price, since company will lose profits.
there will be loss of 89,140 USD.