Question

Waterways is thinking of mass-producing one of its special-order sprinklers. To do so would increase variable costs for all sprinklers by an average of $0.80 per unit. The company also estimates that this change could increase the overall number of sprinklers sold by 10%, and the average sales price would increase $0.20 per unit. Waterways currently sells 485,000 sprinkler units at an average selling price of $28.80. The manufacturing costs are $7,169,000 variable and $2,720,514 fixed. Selling and administrative costs are $2,608,600 variable and $796,520 fixed.

If Waterways begins mass-producing its special-order sprinklers, how would this affect the company?

Answer 1

Net income of company will increase by $98,940

Step-by-step explanation:

As per the data given in the question,

Current situation :

Variable cost per unit = Total variable cost ÷ no. of unit sold

= ($7,169,000+ $2,608,600) ÷ 485,000

= $20.16 per unit

Contribution per unit = $28.80 - $20.16

= $8.64

Contribution margin ratio = $8.64 ÷ $28.80

= 30%

Net income = 485,000 × $8.64 - ($2,720,514 + $796,520)

= $673,366

Present Situation :

Revised variable cost = $20.16 + $0.80 = $20.96

Revised selling price per unit = $28.80 + $0.20 = $29.00

Revised Contribution per unit = $29.00 - $20.96 = $8.04

Revised Contribution margin ratio = $8.04 ÷ $29.00 = 27.72%

Revised Net income = 485,000 × 110% × $8.04 - ( $2,720,514 +$796,520)

= $772,306

Current New Effect

Contribution margin ratio 30% 27.72% 2.28%

Net income = $772,306 - $673,366 = increased by $98,940