Question

Elmwood, Inc. currently sells 13,000 units of its product per year for $110 each. Variable costs total $85 per unit. Elmwood’s manager believes that if a new machine is leased for $224,250 per year, modifications can be made to the product that will increase its retail value. These modifications will increase variable costs by $15.00 per unit, but Elmwood is hoping to sell the modified units for $140 each.

a-1. Should Elmwood modify the units or sell them as is?

• Sell as is

• Sell with modifications

a-2. How much will the decision affect profit?

Answer 1

If the company sell as is

Selling price = $110

Variable cost = $85

Contribution margin = $25

Units sold = 13,000

Total contribution margin = 13,000*25 = $325,000

Net income = $325,000

If the is modified

Selling price = 140

Variable cost = 15 + 85. = $100

Contribution margin = $40

Units sold = 13,000

Total contribution margin = 13,000*40 =. $ 520,000

Leased machine = $224,250

Net income = $295,750

As the net income is higher if the product is sold as is by $325,000 - 295,750 = $29,250 therefore the company should sell the product as it is.

A-2)

As the net income is more if the product is sold as is by $29,250, therefore this decision will increase the profit by $29,250.

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