Question

The following annual per unit cost data at an activity level of 4,000 units has been provided below. The company produces and sells only one product.:

	$ Per
	Unit
Sales	400.00
Direct labor	18.00
Direct material	22.00
Variable manufacturing overhead	4.00
Fixed manufacturing overhead	20.00
Variable selling expenses	2.00
Fixed selling expenses	5.00
Fixed administrative expenses	3.00

The relevant range is 2,500 - 5,500 units. You will be given facts for three different options. Using the facts given, calculate amounts as directed below. Take each option independent of the others (start with the original information given for each).  

You must enter your answer in the following format: $x,xxx

At the current level of activity, calculate the following:

Total sales revenue

Total contribution margin

Total fixed expenses

The company is considering a price reduction approach to increase net income. The company believes that a 10% reduction in sales price will increase volume by 20%. Simultaneously, there will be a change in suppliers for direct material that will result in lowering direct material costs by 15%. Calculate the following:

Total sales revenue

Total contribution margin

Total fixed expenses

The company is also considering an approach that will not alter sales price. The company believes that by laying off non-productive workers they can reduce direct labor to 4% of sales. Combined with a $4,000 increase in advertising per month, they estimate sales will increase 2% over current sales.  Calculate the following:

Total sales revenue

Total contribution margin

Total fixed expenses

Answer 1

Option 1 : Current situation

1. Calculation of sales revenue

activity level = 4000 units

selling price per unit = $ 400

sales revenue = $ 1,600,000

[ 4000 units * $ 400 ]

2. Calculation of contribution margin

particulars	amount ($)
Sales revenue	1,600,000
less: direct materials [ 4000 units * $ 22]	88,000
less: direct labor [ 4000 units * $ 18]	72,000
less: variable manufacturing overheads [ 4000 units * $ 4]	16,000
less: variable selling overheads [ 4000 units * $ 2]	8,000
contribution margin	1,416,000

3.Calculation of total fixed expenses

particulars	amount
fixed manufacturing overheads [ 4000 units * $ 20 ]	80,000
fixed administrative overheads [ 4000 units * $ 3 ]	12,000
fixed selling overheads [ 4000 units * $ 5 ]	20,000
Total fixed expenses	112,000

Option 2 : Reduction in price by 10% , increase sales volume by 20 % and reduction in cost of direct materials by 15%

1. Calculation of sales revenue

activity level = 4800 units

selling price per unit = $ 360

sales revenue = $ 1,728,000

[ 4800 units * $ 360 ]

2. Calculation of contribution margin

particulars	amount ($)
Sales revenue	1,728,000
less: direct materials [ 4800 units * $ 18.7]	89,760
less: direct labor [ 4800 units * $ 18]	86,400
less: variable manufacturing overheads [ 4800 units * $ 4]	19,200
less: variable selling overheads [ 4800 units * $ 2]	9,600
contribution margin	1,523,040

3.Calculation of total fixed expenses

particulars	amount
fixed manufacturing overheads [ 4800 units * $ 20 ]	96,000
fixed administrative overheads [ 4800 units * $ 3 ]	14,400
fixed selling overheads [ 4800 units * $ 5 ]	24,000
Total fixed expenses	134,400

Option 3 : No change in selling price ,Direct labor 4% of sale price , increase sales volume by 2 % and advertising cost $ 4000 per month.

1. Calculation of sales revenue

activity level = 4080 units

selling price per unit = $ 400

sales revenue = $ 1,632,000

[ 4080 units * $ 400 ]

2. Calculation of contribution margin

particulars	amount ($)
Sales revenue	1,632,000
less: direct materials [ 4080 units * $ 22]	89,760
less: direct labor [ 4080 units * $ 16] * reduction of labor cost to 4% of $ 400	65,280
less: variable manufacturing overheads [ 4080 units * $ 4]	16,320
less: variable selling overheads [ 4080 units * $ 2]	8,160
contribution margin	1,452,480

3.Calculation of total fixed expenses

particulars	amount
fixed manufacturing overheads [ 4080 units * $ 20 ]	81,600
fixed administrative overheads [ 4080 units * $ 3 ]	12,240
fixed selling overheads [ 4080 units * $ 5 ]	20,400
advertising expense [ $ 4000 *12 ] * $ 4000 per month for 12 months (annualy)	48,000
Total fixed expenses	162,240