Question

I. Comprehensive review of short-term decisions. The following data relate to the planned operatio ns of Kimble Company before considering the changes described later. All fixed costs are direct, but unavo idable. Product Chair Table Sofa Selling price Variable costs Fixed costs Total costs $120 $ 40 30 $70 $50 8,000 $400 $160 120 $280 $120 3,000 $600 $360 180 $540 $ 60 4,000 Profit per unit Annual volume Required: Answer each of the following questions independently, unless otherwise instructed.

1.) What is total profit expected to be?

2.) What will be the impact on profit if Kimble drops sofas?

3.) What will be the impact on profit if Kimble drops chairs, but is able to shift the facilities to making more sofas so that volume of sofas increases to 7,000 units? (total fixed costs remain constant).

4.) Variable cost per sofa includes $60 for parts that the company now buys outside. The company could make the parts at a variable cost of $45. It would also have to increase fixed costs by $35,000 annually. What would happen to profit if the company took the proposed action?

5.) Kimble has received a special order for 1,000 tables at $245. Capacity is sufficient to make the units, and sales at the regular price would not be affected. What will happen to profit if Kimble accepts the order?

6.) Repeat question 5 above, assuming now that the order is for 1,500 tables and that capacity is limited to 4,000 tables.

Answer 1

As per HOMEWORKLIB RULES, we can answer only 4 sub questions in a question, i am answering the 1st 4 of your question, please break down the question and post which will be easier for experts to answer and also it will be very clear for the students also to understand the same if posted smaller parts of questions.

1. The total profit at the existing level of volume is calculated by multiplying the profit per unit with the annual volume.
   1. Chair : 8000 chairs @ 50 per chair $400,000.
   2. Tables: 3000 tables @ 120 per table $360,000.
   3. Sofa : 4000 sofas @ 60 per sofa $240,000.
   4. Therefore the total profit at the existing volume is $1,000,000.
2. If we drop sofas, the total profit will reduce to the extent of $240,000 from the existing level of $1,000,000 and therefore the profit will reduce by $240,000 and becomes $760,000.
3. If chairs are dropped and sofas volume is increased to 7000 units then,
   1. Sofas : 7000 units @ 60 per sofa = $420,000
   2. Tables : 4000 @ 120 per table = $480,000.
   3. If chairs are dropped and increased sofas volume then profit will become $900,000.
4. Please find the attached image for this answer, where if the company takes the proposed action then profit from sale of sofas will be 4000 sofas @ 66.25 = $265,000. profit will increase by $25,000 if new proposal is implemented.