Waterways is thinking of mass-producing one of its special-order sprinklers. To

Question

Waterways is thinking of mass-producing one of its special-order sprinklers. To do so would increase variable costs for all sprinklers by an average of $0.70 per unit. The company also estimates that this change could increase the overall number of sprinklers sold by 10%, and the average sales price would increase $0.20 per unit. Waterways currently sells 491,740 sprinkler units at an average selling price of $26.50. The manufacturing costs are $6,863,512 variable and $2,050,140 fixed. Selling and administrative costs are $2,651,657 variable and $794,950 fixed. If Waterways begins mass-producing its special-order sprinklers, how would this affect the company? Waterways is thinking of mass-producing one of its special-order sprinklers. To do so would increase variable costs for all sprinklers by an average of $0.70 per unit. The company also estimates that this change could increase the overall number of sprinklers sold by 10%, and the average sales price would increase $0.20 per unit. Waterways currently sells 491,740 sprinkler units at an average selling price of $26.50. The manufacturing costs are $6,863,512 variable and $2,050,140 fixed. Selling and administrative costs are $2,651,657 variable and $794,950 fixed. If the average sales price per sprinkler unit did not increase when the company began mass-producing the special-order sprinkler, what would be the effect on the company?

Explanation / Answer

Statement showing computations Particulars Current Per Unit Current=491,740 New Per unit New = 540,914 Units Change Effect Sales                       26.50       13,031,110.00                                    26.70                   14,442,403.80 Variable Costs Manufacturing Costs                       13.96         6,863,512.00 Sellling and admin costs                          5.39         2,651,657.00 Total Variable Costs                       19.35         9,515,169.00                                    20.05                   10,845,325.70 Contribution = Sales -VC                          7.15         3,515,941.00                                      6.65                     3,597,078.10 Fixed Costs Manufacturing Costs         2,050,140.00                     2,050,140.00 Sellling and admin costs             794,950.00                         794,950.00 Total Fixed Costs         2,845,090.00                     2,845,090.00 Net Income = Cont - Fc             670,851.00                         751,988.10 Increase          81,137.10 Contribution Margin Ratio = Cont/Sales 26.98% 24.91% Decrease -2.07% If Sp did not increase Statement showing computations Particulars Current Per Unit Current=491,740 New Per unit New = 540,914 Units Change Effect Sales                       26.50       13,031,110.00                                    26.50                   14,334,221.00 Variable Costs Manufacturing Costs                       13.96         6,863,512.00 Sellling and admin costs                          5.39         2,651,657.00 Total Variable Costs                       19.35         9,515,169.00                                    20.05                   10,845,325.70 Contribution = Sales -VC                          7.15         3,515,941.00                                      6.45                     3,488,895.30 Fixed Costs Manufacturing Costs         2,050,140.00                     2,050,140.00 Sellling and admin costs             794,950.00                         794,950.00 Total Fixed Costs         2,845,090.00                     2,845,090.00 Net Income = Cont - Fc             670,851.00                         643,805.30 Increase       (27,045.70) Contribution Margin Ratio = Cont/Sales 26.98% 24.34% Decrease -2.64%

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