Consider the following information and answer the question below. Selling Direct
ID: 2404550 • Letter: C
Question
Consider the following information and answer the question below.
Selling
Direct Labour
Advertising
Machinery
Sales
price
cost
cost
costs
Product X
12,000 units
$5 per unit
$3 per unit
$400
$5000
Product Y
16,000 units
$4 per unit
$3.50 per unit
$200
$6200
Which of the following is true? Product X:
Select one:
a. contributes more to profit than Product Y.
b. has higher variable costs than Product Y.
c. produces lower profits than Product Y.
d. has higher fixed costs that Product Y.
Selling
Direct Labour
Advertising
Machinery
Sales
price
cost
cost
costs
Product X
12,000 units
$5 per unit
$3 per unit
$400
$5000
Product Y
16,000 units
$4 per unit
$3.50 per unit
$200
$6200
Explanation / Answer
Solution:
To answer this question, we need to prepare the Income Statement for Product X and Product Y
Product X
Product Y
Sales Revenue
60000
(12,000*5)
64000
(16,000*4)
Variable Costs:
Direct labor cost
36000
(12,000*3)
56000
(16,000*3.5)
Total Variable Costs
36000
56000
Contribution Margin
24000
8000
Fixed Costs:
Advertising Cost
$400
$200
Machinery Costs (assumed fixed overhead)
$5,000
$6,200
Total Fixed Costs
$5,400
$6,400
Profit
$23,600
$7,800
Now, we analyze the given options, Product X
a. contributes more to profit than Product Y ---- It is correct. Product X has higher profit than Product Y. Hence this option is correct.
b. has higher variable costs than Product Y. --- It is not correct. Product X has low variable cost as above statement is showing
c. produces lower profits than Product Y. – Product X produces higher profit than Product Y. It is not correct.
d. has higher fixed costs that Product Y – With assumption, it is not correct. Product X has lower fixed costs than Product Y.
Option a is correct, since product X contributes more to profit than Y.
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Product X
Product Y
Sales Revenue
60000
(12,000*5)
64000
(16,000*4)
Variable Costs:
Direct labor cost
36000
(12,000*3)
56000
(16,000*3.5)
Total Variable Costs
36000
56000
Contribution Margin
24000
8000
Fixed Costs:
Advertising Cost
$400
$200
Machinery Costs (assumed fixed overhead)
$5,000
$6,200
Total Fixed Costs
$5,400
$6,400
Profit
$23,600
$7,800
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