In: Accounting
Hanover Binding plans to produce 40,000 books next year at a
total cost of $1,640,000 with a selling price per book of $66.00.
The fixed costs total $280,000. Management is considering lowering
the price to $60.00 per book, and feels that this action will cause
sales to climb to 50,000 books. What is the amount of incremental
profit if 50,000 books are sold?
$20,000 profit |
$1,700,000 profit |
$1,300,000 profit |
$340,000 prof |
Answer: $ 20,000 Profit
Calculation of Incremental profit if 50,000 books are sold is as follows:
Incremental profit = Increase in Sales revenue - Increase in variable cost
= $ 3,60,000 - $ 3,40,000
= $ 20,000
Thus, Incremental profit if 50,000 books are sold is $ 20,000
Working note:
1. Increased in Sales revenue is as follows:
Current sales 40,000 units ; Proposed sales 50,000 units
Current selling price per unit $ 66 ; Proposed selling price per unit $ 60
Increased in Sales revenue = Proposed Sales revenue - Current Sales revenue
= ( 50,000 units * $ 60 ) - ( 40,000 units * $ 66 )
= $ 30,00,000 - $ 26,40,000
= $ 3,60,000
2. Increased in Increase in variable cost is as follows:
Total cost is $ 16,40,000 at 40,000 units, Whereas Fixed cost is $ 2,80,000
Total cost includes variable cost & fixed cost both.
Variable cost in totality is varry with change in production whereas Varibale cost per unit is same. Fixed cost does not change with change in production. Fixed cost remains same for irrespective of change in production & thus fixed cost will not have any impact on incremental profit
Total cost = Variable cost + Fixed cost
$ 16,40,000 = Variable cost + $ 2,80,000
Thus, Variable cost = $ 16,40,000 - $ 2,80,000 = $ 13,60,000
Variable cost per unit = Variable cost / Number of units produced
= $ 13,60,000 / 40,000
= $ 34.
Therefore,
Increase in variable cost = Increase in production * Variable cost per unit
= 10,000 units * $ 34
= $ 3,40,000
Alternative:
Incremental profit = Proposed profit - Current profit
= $ 10,20,000 - $ 10,00,000
= $ 20,000
Thus, Incremental profit if 50,000 books are sold is $ 20,000
Proposed profit:
Sr.No | Total | Per Unit | |
(i) | Sales ( 50,000 *$60) | $ 30,00,000 | $ 60 |
(ii) | Variable Cost ( 50,000 *$34) | $ 17,00,000 | $ 34 |
(iii) | Contribution [(i)-(ii)] | $ 13,00,000 | $ 26 |
(iv) | Fixed Cost | $ 2,80,000 | |
(v) | Profit [(iii)-(iv)] | $ 10,20,000 |
Current Profit:
Sr.No | Total | Per Unit | |
(i) | Sales ( 40,000 *$66) | $ 26,40,000 | $ 66 |
(ii) | Variable Cost ( 40,000 *$34) | $ 13,60,000 | $ 34 |
(iii) | Contribution [(i)-(ii)] | $ 12,80,000 | $ 32 |
(iv) | Fixed Cost | $ 2,80,000 | |
(v) | Profit [(iii)-(iv)] | $ 10,00,000 |