Question

Glass company manufactures glasses that it sells to mail-order distributors.                                                                         

Sales price per pair of glasses:                                                    $58                       

Manufacturing and other costs follow:                                                                                  

Variable Cost per unit                                                                                    

Direct Materials                                                $11                       

Direct labor                                                         10                          

Factory overhead                                                            2                             

Variable distribution costs are for transportation to mail-order distributors                                                            3                             

Total Variable costs                                                         $26                       

Fixed costs per month                                                                                   

Factory overhead                                                            $20,000                               

Selling and Administrative                                                            10,000                  

Total Fixed costs                                                               $30,000                               

Current monthly production and sales volume                                                                    5,000     units

Monthly capacity                                                                              6,000     units   

Required: Determine the effect of each of the following independent situations on monthly profits.                                                                                        

Make sure you show you work and give a recommendation to management if they should accept the change or not accept the change.                                                                                         

#1 A $3 increase in the unit selling price should result in a 1,200-unit decrease in monthly sales                                                                                  

#2 A 10% decrease in the unit selling price should result in a 2,000-unit increase in monthly sales. However, because of capacity constraints, the last 1,000 units would be produced during overtime with the direct labor costs increasing by 60%.   

#3 a British distributor has proposed to place a special one-time order for 1,000 units at a reduced price of $54 per unit. The distributor would pay all transportation costs, so there are no variable distribution costs. There would be additional fixed selling and administrative costs of $2,000.           

Answer 1

#1 We Should accept #1 plan we will get extra $1.11 per unit profit As per Below Statement:-

	Current	# 1
Description	Amount in $	Amount in $
Units Sales (A)	5,000	3,800
Sales Price Per unit (B)	58	61
Total Variable Cost Per Unit (C)	26	26
Contribution Per Unit :- D= (B-C)	32.00	35.00
Fix cost Per Month ('E)	30,000.00	30,000.00
Net Profit Per Unit (F)
Total Contribution G= (D*A)	160,000.00	133,000.00
Total Profit for Month H= (G-E)	130,000.00	103,000.00
Profit Per Unit---------------> H/A	26	27.11

#2 We should not go for #2 plan because our profit per unit in decreasing by $ 10.8-/- however units is sold increased as per below statement:-

	Current	# 2
Description	Amount in $	Amount in $
Units Sales (A)	5,000	6,000
Sales Price Per unit (B)	58	52.20
Total Variable Cost Per Unit (C)	26	26
Add Increase in Labour Cost 60%		6
Contribution Per Unit :- D= (B-C)	32.00	20.20
Fix cost Per Month ('E)	30,000.00	30,000.00
Net Profit Per Unit (F)
Total Contribution G= (D*A)	160,000.00	121.200.00
Total Profit for Month H= (G-E)	130,000.00	91,200.00
Profit Per Unit---------------> H/A	26	15.20

#3 We should not go for plan #3 as due to this we will get extra loss of $ 4000 for 1000 units as per below statement:-

	# 3
Description	Amount in $
Units Sales (A)	1,000.00
Sales Price Per unit (B)	54.00
Total Variable Cost Per Unit (C)	26.00
Add Increase in Labour Cost 40%	-
Contribution Per Unit :- D= (B-C)	28.00
Fix cost Per Month ('E) With Extra $ 2,000	32,000.00
Net Profit Per Unit (F)
Total Contribution G= (D*A)	28,000.00
Total Profit for Month H= (G-E)	-4,000.00
Profit Per Unit---------------> H/A	-4.00

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