Question

Waterways is thinking of mass-producing one of its special-order sprinklers. To do so would increase variable costs for all sprinklers by an average of $0.70 per unit. The company also estimates that this change could increase the overall number of sprinklers sold by 10%, and the average sales price would increase $0.20 per unit. Waterways currently sells 481,000 sprinkler units at an average selling price of $25.20. The manufacturing costs are $5,811,160 variable and $2,155,660 fixed. Selling and administrative costs are $2,673,680 variable and $798,370 fixed.

If the average sales price per sprinkler unit did not increase when the company began mass-producing the special-order sprinkler, what would be the effect on the company? (Round answers to 0 decimal places, e.g. 5% or 2,520.)

Contribution margin ratio		IncreaseDecrease		by			%
Profit		DecreaseIncrease		by		$

Answer 1

Contrubtion margin - OLD

Total Sales	12,121,200
Less: Variable Costs
Manufacturing	5,811,160
Selling and Admin	2,673,680
Total Variable Costs	8,484,840
Contribution	3,636,360
Less: Fixed Costs
Manufacturing	2,155,660
Selling and Admin	798,370
Total Fixed Costs	2,954,030
Profit	682,330
Contribution Margin	30%

Variable cost = 8,484,840 / 481,000 = 17.64 per sprinkler

New variable cost = 17.64 + 0.70 = 18.34

New Sale price = 25.40

New contribution margin = 18.34 / 25.40 = 27.80%

New details

Total Sales	13,439,140
Less: Variable Costs
Total Variable Costs	9,703,694
Contribution	3,735,446
Less: Fixed Costs
Manufacturing	2,155,660
Selling and Admin	798,370
Total Fixed Costs	2,954,030
Profit	781,416
Contribution Margin	27.80%

Particulars	Current	New	Effect	Effect
Contribution Margin Ratio	30%	27.80%	Decrease	by 2.20%
Net Income	682,330	781,416	Increase	99,086

IF UNIT PRICE DID NOT INCREASE THEN

Total Sales	12,121,200	13,333,320
Less: Variable Costs
Manufacturing	5,811,160	9,703,694
Selling and Admin	2,673,680
Total Variable Costs	8,484,840	9,703,694
Contribution	3,636,360	3,629,626
Less: Fixed Costs
Manufacturing	2,155,660	2,155,660
Selling and Admin	798,370	798,370
Total Fixed Costs	2,954,030	2,954,030
Profit	682,330	675,596
Contribution Margin	30%	27.22%

Particulars	Current	New	Effect	Effect
Contribution Margin Ratio	30%	27.22%	Decrease	by 2.78%
Net Income	682,330	675,596	Decrease	Decrease by 6,734