3. Harry\'s Sandwich Shop uses a process costing system for its foot-long sub sa
ID: 416492 • Letter: 3
Question
3. Harry's Sandwich Shop uses a process costing system for its foot-long sub sandwiches and carries no beginning or ending Work in Process inventories. During 2017, the company produced and sold 5,000 subs and incurred the following costs: Total $5,600 8,800 I7,200 $21,600 Per equivalent unit $1.12. Direct material Direct labor Manufacturing overhead Total 1.76 1.44 $4.32 The current selling price is $6.25 per sub and the gross profit for 2017 was ($6.25 x 5,000)-($4.32 x 5,000) = $9,650. Sales projections for 2018 at the current price look flat, but the manager believes that if the sales price is reduced to $5.80, sales volume would increase by 600 units. Assume that direct material and direct labor are variable costs and that manufacturing overhead costs are primarily fixed. Should Harry's Sandwich Shop lower the selling price?Explanation / Answer
To be calculated:
Whether Harry should lower the selling price of sandwiches or not.
Given values:
Current sales volume = 5000 subs
Current per equivalent unit costs = $4.32
Current selling price = $6.25
Current profit = $9,650
Solution:
Suggested selling price = $5.80
Projected sales volume = 5000 + 600 = 5600 subs
Manufacturing overhead (fixed cost) = $7200 or $1.44 per unit
New direct material costs (variable cost) = $5600 + ($1.12 x 600) = $5600 + $672 = $6,272
Per equivalent direct material cost = $6,272 / 5600 = $1.12 per unit
New direct labour costs (variable cost) = $8800 + ($1.76 x 600) = $8800 + $1056 = $9,856
Per equivalent direct labour cost = $9,856 / 5600 = $1.76 per unit
Total per equivalent unit costs = $4.32
Profit = Revenue - Costs
New Profit = ($5.80 x 5600) - ($4.32 x 5600)
New Profit = $32,480 - $24,192
New Profit = $8,288
Earlier profit = $9,650
Reduction in profit = $9,650 - $8,288
Reduction in profit = $1,362
Although, by reducing the price of the sandwiches, the sales volume will increase by 600 units but the overall profit of the Harry's sandwich shop will decrease by $1,362. Therefore, Harry should not reduce the selling price of the sandwiches.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.