Answered

(b1) 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 491,740 sprinkler units at an average selling price of $26.50. The manufacturing costs are $6,863,512 variable and $2,050,140 fixed. Selling and administrative costs are $2,651,657 variable and $794,950 fixed. If Waterways begins mass-producing its special-order sprinklers, how would this affect the company



Answer :

jepessoa

Answer:

operating income will increase by $81,137.10 or 12.09%

Explanation:

we must first determine the old contribution margin of the sprinklers:

total variable costs = $6,863,512 + $2,651,657 = $9,515,169

total units sold = 491,740

variable cost per unit = $9,515,169 / 491,740 = $19.35

selling price per unit = $26.50

old contribution margin = $26.50 - $19.35 = $7.15

the new contribution margin per unit:

selling price = $26.70

variable cost per unit = $20.05

new contribution margin = $6.65

increase in units sold = 491,740 x 10% = 49,174 units

the impact of new product:

before, the company's total contribution margin was 491,740 x $7.15 = $3,515,941

operating income = $3,515,941 - $2,050,140 - $794,950 = $670,851

the new total contribution margin = 540,914 x $6.65 = $3,597,078.10

new operating income = $3,597,078.10 - $2,050,140 - $794,950 = $751,988.10

change in operating income = $751,988.10 - $670,851 = $81,137.10 or 12.09% increase