Question

*38) Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows:*

T-SHIRTS SWEATSHIRTS
Production and sales volume 60,000 units 35,000 units
Selling price $16.00 $29.00
Direct material $ 2.00 $ 5.00
Direct labor $ 4.50 $ 7.20
Manufacturing overhead $ 2.00 $ 3.00
Gross profit $ 7.50 $13.80
Selling and administrative $ 4.00 $ 7.00
Operating profit $ 3.50 $ 6.80

What is the projected decline in operating income if the direct materials costs of T-Shirts increase to $3.50 per unit and direct labor costs of Sweatshirts increase to $13.00 per unit?
A) $293,000
B) $90,000
C) $203,000
D) $473,000

Answer 1

To calculate the projected decline in operating income given the changes in direct material and direct labor costs for T-Shirts and Sweatshirts, we need to compare the current operating income to the projected operating income. By calculating the costs and quantities for each product line, we can determine the decline. The projected decline in operating income is $203,000.

Step-by-step explanation:

To calculate the projected decline in operating income, we need to calculate the current operating income and the projected operating income. Firstly, let's calculate the current operating income:

1. For T-Shirts, the direct material cost is $2.00 per unit and the direct labor cost is $4.50 per unit. So the current cost per unit for T-Shirts is $6.50 ($2.00 + $4.50).
2. For Sweatshirts, the direct material cost is $5.00 per unit and the direct labor cost is $7.20 per unit. So the current cost per unit for Sweatshirts is $12.20 ($5.00 + $7.20).
3. The current operating income can be calculated as follows: ($16.00 - $6.50) * 60,000 + ($29.00 - $12.20) * 35,000.
4. Calculate the projected operating income using the new direct material and direct labor costs.
5. Subtract the projected operating income from the current operating income to find the projected decline in operating income.

Based on the calculations, the projected decline in operating income is $203,000 (Option C).