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

Sales revenue will increase, Variable Cost per unit will remain same, but total variable cost will increase due to increased volume, Fixed Cost will remain same and operating Income will decrease by $275000. (2595000-2320000)

Since Operating Income is decreasing , decision is not correct.

Particulars Per Unit 3000 Units Per Unit 3700 Units Sales 4250 12750000 3750 13875000 Less: Variable Cost Material 495 1485000 495 1831500 Labour 795 2385000 795 2941500 Overhead 475 1425000 475 1757500 Marketing Cost 235 705000 235 869500 Total Variable Cost 2000 6000000 2000 7400000 Contribution Margin: 4250-2000 2250 6750000 1750 6475000 Fixed Cost Manufacturing Overhead: (640*3000) 1920000 1920000 Marketing Cost: (745*3000) 2235000 2235000 Total Fixed Cost 4155000 4155000 Operating Income: (6750000-4155000) 2595000 2320000

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