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 497,000 sprinkler units at an average selling price of $25.60. The manufacturing costs are $6,925,390 variable and $1,733,086 fixed. Selling and administrative costs are $2,617,010 variable and $783,290 fixed. If Waterways begins mass-producing its special-order sprinklers, how would this affect the company? (Round ratio to 0 decimal places, e.g. 5% and Net income to 0 decimal places, e.g. 2,520.) Current New Effect Contribution margin ratio % % Decrease by Net income Increase bys LINK TO TEXT LINK TO TEXT LINK TO TEXT 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 497,000 sprinkler units at an average selling price of $25.60. The manufacturing costs are $6,925,390 variable and $1,733,086 fixed. Selling and administrative costs are $2,617,010 variable and $783,290 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? (Round answers to 0 decimal places, e.g. 5% or 2,520.) Contribution margin ratio À by % Profit by $}

Answer 1

	Current	New	Effect
Contribution margin ratio	25%	23%	Decrease by	2%
Net Income	$664424	$709154	Increase by	$44730

Increase in sales level

New Sale in units =497000 * 110% = 546700

New selling price = $25.60 + $0.20 = $25.80

Current Variable cost pu = ($6925390 + $2617010)/497000 = $19.20

sales (546700 unit * $25.80) = $14104860

less: Total variable cost [546700 * ($19.20+$0.70)] = $10879330

less: Total fixed cost ($1733086+ $783290) = $2516376

Net operating income $709154

Additional units would have to be sold:

Increase in income

= New sales level's profit - current sales level'sprofit

= $709154 - $664424

=$44730

Current sales level

Sales(497000 units * $25.60) = $12723200

less: variable cost($6925390 +$2617010) = $9542400

less: Fixed cost ($1733086 + $783290) = $2516376

Net operating income $664424

Contribution Margin Ratio :-

Current = Contribution pu/SP pu * 100

Contribution pu = SP pu – VC pu

      = $25.60 - $19.20 = $6.40

Ratio = $6.40/$25.60 * 100 = 25%

New = Contribution pu/SP pu * 100

Contribution pu = SP pu – VC pu

      = $25.80 - $19.90 = $5.90

Ratio = $5.90/$25.80 * 100 = 23%

Contribution margin ratio	Decrease by	3%
Profit	Decrease by	$64610

Contribution Margin Ratio :-

Current = Contribution pu/SP pu * 100

Contribution pu = SP pu – VC pu

      = $25.60 - $19.20 = $6.40

Ratio = $6.40/$25.60 * 100 = 25%

New = Contribution pu/SP pu * 100

Contribution pu = SP pu – VC pu

      = $25.60 - $19.90 = $5.70

Ratio = $5.70/$25.60 * 100 = 22%

Increase in sales level

New Sale in units =497000 * 110% = 546700

Current Variable cost pu = ($6925390 + $2617010)/497000 = $19.20

sales (546700 unit * $25.60) = $13995520

less: Total variable cost [546700 * ($19.20+$0.70)] = $10879330

less: Total fixed cost ($1733086+ $783290) = $2516376

Net operating income $599814

Additional units would have to be sold:

Increase in income

= New sales level's profit - current sales level'sprofit

= $599814 - $664424

=($64610)