Question
In: Accounting
Elmwood, Inc. currently sells 13,000 units of its product per year for $110 each. Variable costs...
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?
Solutions
Expert Solution
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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ekkarill92 answered 1 year agoRelated Solutions
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