Question

Head Pops Inc. manufactures two models of solar-powered, noise-canceling headphones: Sun Sound and Ear Bling models. The company is operating at less than full capacity. Market research indicates that 28,000 additional Sun Sound and 30,000 additional Ear Bling headphones could be sold. The operating income by unit of product is as follows:

Sun Sound Headphone Ear Bling Headphone
Sales price $140.00 $125.00
Variable cost of goods sold 78.40 70.00
Manufacturing margin $61.60 $55.00
Variable selling and administrative expenses 28.00 25.00
Contribution margin $33.60 $30.00
Fixed manufacturing costs 14.00 12.50
Income from operations $19.60 $17.50

Required:
Prepare an analysis indicating the increase or decrease in total profitability if 28,000 additional Sun Sound and 30,000 additional Ear Bling headphones are produced and sold, assuming that there is sufficient capacity for the additional production. Round your per-unit answers to two decimal places.

Answer 1

Answer and Explanation:

The preparation of the analysis is presented below

Particulars Sun Sound Headphones Ear Bling Headphones

Unit volume increase 28,000 30,000

x Contribution margin

per unit $33.6 $30

Increase in profitability $940,800 $900,000

We simply multiplied the increase in volume unit with the contribution margin per unit so that the increase in profitability could arrive