Question

In: Accounting

Hanover Binding plans to produce 40,000 books next year at a total cost of $1,640,000 with...

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

Solutions

Expert Solution

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

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