Signature Pen Company manufactures ballpoint and fountain pens and is operating

Question

Signature Pen Company manufactures ballpoint and fountain pens and is operating at less than full capacity. Market research indicates that 6,000 additional ballpoint pens and 8,500 additional pens could be sold. The income from operations by unit of product is as follows:
Ballpoint pen Fountain Pen
Sales price $5.50 $15.00
Variable cost of goods 2.80 8.30
Manufacturing margin $2.70 $6.70
Variable selling and administrative expenses 1.10 2.80
Contribution margin $1.60 $3.90
Fixed manufacturing costs 0.50 1.00
Income from operations $1.10 $2.90

Prepare an analysis indicating the increase or decrease in total profitability if 6,000 additional ballpoint pens and 8,500 additional fountain pens are produced and sold, assuming that there is sufficient capacity for the additional production.

Explanation / Answer

Profitability analysis: Here we have to prepare the income statements for the two products to analyse the profitability. As the company has sufficient capacity to produce the additional units the impact of the additional units on the profit can be calculated as follows; Particulars Ball point pen Fountain pen Sales (no. of units x selling price) 33,000 127,500 Variable cost of goods 16,800 70,550 Manufacturing margin 16,200 56,950 Variable selling and administrative expenses 6,600 23,800 Contribution margin 9,600 33,150 Fixed manufacturing costs 3,000 8,500 Income from operations 6,600 24,650 As the income from the ball point pen and fountain pen are high the profitability of the products are high hence the additional units of production can be undertaken. Here we have to prepare the income statements for the two products to analyse the profitability. As the company has sufficient capacity to produce the additional units the impact of the additional units on the profit can be calculated as follows; Particulars Ball point pen Fountain pen Sales (no. of units x selling price) 33,000 127,500 Variable cost of goods 16,800 70,550 Manufacturing margin 16,200 56,950 Variable selling and administrative expenses 6,600 23,800 Contribution margin 9,600 33,150 Fixed manufacturing costs 3,000 8,500 Income from operations 6,600 24,650 As the income from the ball point pen and fountain pen are high the profitability of the products are high hence the additional units of production can be undertaken. Particulars Ball point pen Fountain pen Sales (no. of units x selling price) 33,000 127,500 Variable cost of goods 16,800 70,550 Manufacturing margin 16,200 56,950 Variable selling and administrative expenses 6,600 23,800 Contribution margin 9,600 33,150 Fixed manufacturing costs 3,000 8,500 Income from operations 6,600 24,650

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