Question

Moscot manufactures high-end sunglasses that it sells in retail shops and online for $310, on average. P17-33 Applications of Differential Analysis Assume the following represent manufacturing and other costs. Variable costs per Unit Direct materials. Direct labor. Factory overhead. Distribution .. Total Fixed Costs per Month $ 80 Factory overhead..... 50 Selling and administrative. 35 Total. $450,000 375,000 $825,000 10 $175 The variable distribution costs are for transportation to retail partners. Assume the current monthly production and sales volume is 15,000 units. Monthly capacity is 20,000 units. Required Determine the effect of each of the following independent situations on monthly profits. a. A $50 increase in the unit selling price should result in a 2,000-unit decrease in monthly sales. b. A 10% decrease in the unit selling price should result in a 6,000-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 50%. c. A British distributor has proposed to place a special, one-time order for 1,000 units at a reduced price of $250 per unit. The distributor would pay all transportation costs. There would be additional fixed selling and administrative costs of $750.

Answer 1

Answer-

Working Note- Calculation of Profit in Normal Situation-

Particulars	Amount
Sales per unit (A)	310
Less- Variable cost Per Unit
Direct Materials	80
Direct Labour	50
Factory Overhead	35
Distribution	10
Variable cost Per Unit (B)	175
Contribution Per Unit (C) = (A) - (B)	135
Total Contribution (135 * 15,000)	2,025,000
Less - Fixed Costs
Factory Overhead	4,50,000
Selling and Distribution	3,75,000
Fixed Costs	8,25,000
Total Profit	12,00,000

Answer a) Calculation of Profit if increase in selling price-

Particulars	Amount
Sales per unit (A)	360
Less- Variable cost Per Unit
Direct Materials	80
Direct Labour	50
Factory Overhead	35
Distribution	10
Variable cost Per Unit (B)	175
Contribution Per Unit (C) = (A) - (B)	185
Total Contribution (185 * 13,000)	2,405,000
Less - Fixed Costs
Factory Overhead	4,50,000
Selling and Distribution	3,75,000
Fixed Costs	8,25,000
Total Profit	15,80,000

Answer b) Calculation of Profit if decrease in selling price-

Particulars	Amount
Sales per unit (A)	279
Less- Variable cost Per Unit
Direct Materials	80
Direct Labour	50
Factory Overhead	35
Distribution	10
Variable cost Per Unit (B)	175
Contribution Per Unit (C) = (A) - (B)	104
Total Contribution (104 * 21,000)	2,184,000
Less - Fixed Costs
Factory Overhead	4,50,000
Selling and Distribution	3,75,000
Labour Overtime (1000*25)	25,000
Fixed Costs	8,50,000
Total Profit	13,34,000

Answer C) Calculation of Profit if additional order of 1000 units-

Particulars	Amount
Sales Price per unit from additional order (A)	250
Less - Variable Costs
Direct Materials	80
Direct Labour	50
Direct Overhead	35
Variable cost Per Unit (B)	165
Contribution Per Unit (C) = (A) - (B)	85
Total Contribution from additional order (D) (85*1000)	85,000
Less- Addditional Fixed Cost incurrred for Order (E)	750
Total Profit from additional order (F) = (D) - (E)	84,250
Profit from normal production (G)	1,200,000
Total Profit (H) = (F) + (G)	1,284,750

Answer D) Calculation of Profit if additional order of 6000 units-

Since order is for 6000 units and Moscot has capacity of 20,000 units, only 14,000 units can be sold in regular market

Particulars	For 14000 units	For 6000 units
Sales per unit (A)	310	250
Less- Variable cost Per Unit
Direct Materials	80	80
Direct Labour	50	50
Factory Overhead	35	35
Distribution	10	-
Variable cost Per Unit (B)	175	165
Contribution Per Unit (C) = (A) - (B)	135	85
Units (D)	14,000	6,000
Total Contribution (E) = (C) * (D)	1,890,000	510,000
Less - Fixed Costs
Factory Overhead	4,50,000	-
Selling and Distribution	3,75,000	10,000
Fixed Costs	825,000	10,000
Total Profit	1,065,000	500,000

Total Profit will be = 1,065,000 + 500,000

= 1,565,000