80. The Harvey Company has provided the following information about its only pro

Question

80. The Harvey Company has provided the following information about its only product when they sold 10,000 units (all items are per unit). Revenue Direct labor cost Direct materials $15.00 1.50 2.00 6.00 Allocated manufacturing overhead (1/3 is variable, 2/3 is fixed) Selling and administrative 1.00 (1/2 is variable, 2 is fixed) Profit before tax $4.50 For every additional unit sold above 10,000, the company's profit before taxes will increase by: A. $4.50 per unit B. $9.00 per unit C. $7.00 per unit D. $11.50 per unit Self-test-B 3-15

Explanation / Answer

As the name suggests, fixed costs remain fixed irrespective of the output. Only variable costs change according to the output.

Variable cost per unit = Direct Labor + Direct Materials + 1/3 allocated manufacturing overhead + 1/2 selling and administrative expenses

= 1.50+2+(1/3 x 6)+(1/2 x 1)

=$ 6 per unit

For every unit above 10,000 units, the profits will increase by = Selling price per unit - Variable cost per unit

= $15-$6

=$9 per unit (Option B)

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