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 $0.70 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 490,000 sprinkler units at an average selling price of $28.60. The manufacturing costs are $7,866,260 variable and $2,011,486 fixed. Selling and administrative costs are $2,644,240 variable and $809,370 fixed. If the average sales price per sprinkler unit did not increase when the company began mass-producing the special-order sprinkler, what would be the effect on the company

Answer 1

Effect on income= $26,950 decrease

Step-by-step explanation:

Giving the following information:

Increase in unitary production costs= $0.7

Increase in units sold= 49,000

Variable selling and administrative costs= $2,644,240

Variable manufacturing costs= $7,866,260

First, we need to calculate the unitary variable manufacturing costs and unitary variable selling and administrative costs:

Unitary variable manufacturing costs= 7,866,260/490,000= $16.05 + 0.7= $16.75

Unitary variable selling and administrative costs= 2,644,240/490,000= $5.40

Now, to determine the effect on income, we need to use the following formula:

Effect on income= Increase in contribution margin new sales - decrease in contribution margin old sales

Effect on income= 49,000*(28.6 - 16.75 - 5.4) - 490,000*0.7

Effect on income= 316,050 - 343,000

Effect on income= $26,950 decrease