Air Production Company produces pneumatic lifts used to assist emergency rescue

Question

Air Production Company produces pneumatic lifts used to assist emergency rescue teams used to assist victims of auto and other accidents. The costs of manufacturing and marketing the pneumatic lifts at the company’s normal volume of 3000 per month are shown in Exhibit 1.

Exhibit 1

Unit manufacturing costs:

Variable materials $495

Variable labor $795

Variable Overhead $475

Fixed Overhead $640

Total unit manufacturing costs $2,405

Unit marketing costs:

Variable $235

Fixed $745

Total unit marketing costs $980

Total unit costs $3,385

Questions:

The following refers to the data given in exhibit 1. Treat each problem separately. Unless otherwise stated, assume a selling price of $4250 per lift. Ignore income taxes. Assume no beginning or ending inventories.

2. Company research indicates that monthly sales have a potential of 3700 units, within manufacturing capacity limit of 4200, if the price were decreased from $4250 to $3750 per unit. Based on the cost data in exhibit 1, what would be the impact of the price decrease on sales, costs, and operating income per month. Which option do you recommend and support your decision?

Explanation / Answer

Ans) Company Manufacturing cost 3000 Units per month Particulars Amount Selling Price (A) $                  12,750,000 Variable Material Cost $                    1,485,000 Variable Labour Cost $                    2,385,000 Variable Overhead $                        475,000 Variable Marketing Cost $                        705,000 $                    5,050,000 Fixed Cost $                    4,155,000 (1920000+2235000) Total Cost $                    9,205,000 Total Profit $                    3,545,000 what would be the impact of the price decrease on sales, costs, and operating income per month. If the Sales price was reduce to 3750 per unit Particulars Amount Selling Price (A) $                  11,250,000 Variable Material Cost $                    1,485,000 Variable Labour Cost $                    2,385,000 Variable Overhead $                        475,000 Variable Marketing Cost $                        705,000 $                    5,050,000 Fixed Cost $                    4,155,000 Total Cost $                    9,205,000 Total Profit $                    2,045,000 Do to the price change the company net profit would be $2,045,000 Which option do you recommend and support your decision? Ans) I suggest only first option with the Sale price of $4250 per unit

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