Question

Variety Artisans has a bottleneck in their production that occurs within the engraving department. Arjun Naipul, the COO, is considering hiring an extra worker, whose salary will be $45,000 per year, to solve the problem. With this extra worker, the company could produce and sell 3,500 more units per year. Currently, the selling price per unit is $18 and the cost per unit is $5.85.

Direct materials $2.50

Direct Labour 1.10

Variable overhead 0.45

Fixed overhead (primarly depreciation of equitment) 1.80

Total $5.85

Requirements:1.Using the information provided, calculate the annual financial impact of hiring the extra worker(i.e., calculate the profit increase, or decrease, after hiring an additional worker).

Answer 1

The fixed overhead is only the Depreciation. It won't change with the new hiring. So it is irrelevant for this decision.

This means that cost of production is 5.85 - 1.8 = 4.05 per unit
Selling price is 18 per unit
Gain on each unit is 13.95

Total gain on 3,500 units will be 48,825

Annual increase would be 3,825

Sales	63,000	18 X 3,500
Direct Materials	8,750	2.50 X 3,500
Direct Labour	3,850	1.10 X 3,500
Variable Overhead	1,575	0.45 X 3,500
Fixed Overhead	-	Irrelevant
New Worker Salary	45,000
Net Income	3,825