Question

Consider the following information and answer the question below.

		Selling	Direct Labour	Advertising	Machinery
	Sales	price	cost	cost	costs
Product X	12,000 units	$5 per unit	$3 per unit	$400	$5000
Product Y	16,000 units	$4 per unit	$3.50 per unit	$200	$6200

Which of the following is true? Product X:

Select one:

a. contributes more to profit than Product Y.

b. has higher variable costs than Product Y.

c. produces lower profits than Product Y.

d. has higher fixed costs that Product Y.

Answer 1

Solution:

To answer this question, we need to prepare the Income Statement for Product X and Product Y

	Product X	Product Y
Sales Revenue	60000 (12,000*5)	64000 (16,000*4)
Variable Costs:
Direct labor cost	36000 (12,000*3)	56000 (16,000*3.5)
Total Variable Costs	36000	56000
Contribution Margin	24000	8000
Fixed Costs:
Advertising Cost	$400	$200
Machinery Costs (assumed fixed overhead)	$5,000	$6,200
Total Fixed Costs	$5,400	$6,400
Profit	$23,600	$7,800

Now, we analyze the given options, Product X

a. contributes more to profit than Product Y ---- It is correct. Product X has higher profit than Product Y. Hence this option is correct.

b. has higher variable costs than Product Y. --- It is not correct. Product X has low variable cost as above statement is showing

c. produces lower profits than Product Y. – Product X produces higher profit than Product Y. It is not correct.

d. has higher fixed costs that Product Y – With assumption, it is not correct. Product X has lower fixed costs than Product Y.

Option a is correct, since product X contributes more to profit than Y.

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