Question

Part 2 contains 3 Decision making recommendations that are independent of each other. Covers material in Module 17
Glass company manufactures glasses that it sells to mail-order distributors.
Sales price per pair of glasses:	$62
Manufacturing and other costs follow:
Variable Cost per unit
Direct Materials	$13
Direct labor	12
Factory overhead	2
Distribution	3
Total Variable costs	$30
Fixed costs per month
Factory overhead	$20,000
Selling and Administrative	10,000
Total Fixed costs	$30,000
Current monthly production and sales volume		6,000	units
Monthly capacity		7000	units
Additional information: The variable distribution costs are for transportation to mail-order distributors.
Required: Determine the effect of each of the following 3 independent situations on monthly profits.
Make sure you show your computations to provide the monthly change in income and give a recommendation to management if they should accept the change.
#1 A $3 increase in the unit selling price should result in a 1,000-unit decrease in monthly sales
#2 A 10% decrease in the unit selling price should result in a 2,000-unit increase in monthly sales.
However, because of capacity constraints, the last 1,000 units would be produced during overtime with the direct labor costs increasing by 40%.
#3 a British distributor has proposed to place a special one-time order for 1,000 units at a reduced price of $57 per unit. The distributor would pay all transportation costs, so there are no variable distribution costs. There would be additional fixed selling and administrative costs of $1,000.

Answer 1

X fa 1 G current monthly profit = $1,62,000 new monthly profit = $1,45,000 decrease decision- reason in monthly profit = $17,000 don't accept the change because the net income is decreasing new monthly profit = $1,71,600 increase decision- reason in monthly profit = $9,600 accept the change because the net income is increasing new monthly profit = $1,91,000 increase in monthly profit = $29,000 decision- accept the change reason because the net income is increasing

For formulas and calculations, refer to the image below -

B4 A B C current monthly profit = =(62-30)*6000) - 30000 new monthly profit = =((65-30) *5000)-30000 decrease in monthly profit = =E4-E2 decision- don't accept the change reason - because the net income is decreasing new monthly profit = =(((62*0.9)-30)*7000)-30000+(((62*0.9)-(30+12*0.4))*1000) increase decision- reason - in monthly profit = =E10-E2 accept the change because the net income is increasing new monthly profit = =((62-30)*6000)-30000+((57-27)*1000)-1000 increase in monthly profit = =E16-E2 decision- accept the change reason - because the net income is increasing

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