Question

The Night & Day Guitar company is a manufacturer of custom guitars. The selling price for one of their guitars is $920 with direct materials and direct labor costing $225 and $345 per guitar respectively. The fixed manufacturing costs for the Night & Day Guitar company are $8778 and the variable overhead is $50 per unit. The fixed and variable selling expenses are $1804 and $82 per guitar respectively. The variable shipping costs per guitar are $112. Remaining fixed period costs are $1404. During the period, Night and Day sold 122 guitars.

Night & Day is considering upping the quality of the raw materials they use in their guitars. The increase is expected to increase sales by 35 guitars, but it is also expected to increase the cost of direct materials by $58 per guitar. The higher quality material is slightly more difficult to work with, and as a result, direct labor is expected to increase by $11 per guitar.

What is the impact of the decision on the net income of Night and day. An increase in net income should be entered as a positive number, a decrease in net income should be entered as a negative number. Round your answer to the whole dollar.

Answer 1

Income Statement
	Current (122 Units)	Proposed(157 Units)
Sales Revenue	$ 112,240.0	$ 144,440.0
Less: Variable Costs
Direct material	$    27,450.0	$    44,431.0
Direct Labor	$    42,090.0	$    55,892.0
Variable Overheads	$      6,100.0	$       6,100.0
Variable selling Expenses	$    10,004.0	$    10,004.0
Contribution margin	$    26,596.0	$    28,013.0
Less: Fixed costs
Fixed Overheads	$      8,778.0	$       8,778.0
Fixed selling expense	$      1,804.0	$       1,804.0
Other Fixed costs	$      1,404.0	$       1,404.0
Net Income	$    14,610.0	$    16,027.0

Net Increase in net income of (16027-14610) $1417.

Fixed cost will remain the same in both cases.

variable cost for which no information is givrn are assumend to be same.