Question

The Moore Division of Block C Enterprises manufactures and sells specialty semiconductors. Moore sells 1350 of one of these specialized semiconductors each month at a price of $1200 each. Variable costs amount to $1,000,000, and fixed costs are $400,000. Currently Moore has a defect rate of 6 percent (which are chips returned by customers, scrapped, or replaced). Note that the variable costs include the cost of producing the defective chips. If the defect rate can be reduced to zero, calculate the percent increase in profit associated with producing this semiconductor. **please explain the steps in solving Options: 43.5 44.7 45.1 45.4 45.7 46.1 47.5 51.8

Answer 1

INCOME STATEMENT WHEN DEFECT IS 6%
PARTICULARS	UNITS	PRICE	TOTAL
SALES	1350	1200	16,20,000.00
VARIABLE COST	1432	-696.30	-10,00,000.00
CONTRIBUTION			6,20,000.00
FIXED COST			-4,00,000.00
PROFIT			2,20,000.00
INCOME STATEMENT WHEN DEFECT IS 0%
PARTICULARS	UNITS	PRICE	TOTAL
SALES	1432	1200	17,23,200.00
VARIABLE COST	1432	-696.30	-10,00,000.00
CONTRIBUTION			7,23,200.00
FIXED COST			-4,00,000.00
PROFIT			3,23,200.00
DIFFERENCE IN PROFIT			1,03,200.00
DIFFERENCE IN (%)			44.7%

WORKING NOTES-

1] WHEN THE DEFECT IS 6% , IT MEANS THE ACTUAL UNITS SOLD [OUTFLOW] ARE 1350*106% =1432 UNITS

HENCE WE DIVIDE THE VARIABLE COST WITH 1432 UNITS, BUT CALCULATE REVENUE ONLY ON 1350 UNITS

2] WHEN THE DEFECT IS 0% WE SELL 6 % MORE PRODUCTS , HENCE THE VARIABLE COST REMAINING CONSTANT , WE HAVE ADDITIONAL REVENUE OF 82 UNITS [DIFFERENTIAL UNITS]

3] FIXED COSTS CANNOT CHANGE AND THE PROFIT IS INCREASED BY 44.7% W.R.T. 2,20,000