Question

Question 7

[The following information applies to the questions displayed below.) Listed here are the total costs associated with the production of 1,000 drum sets manufactured by TrueBeat. The drum sets sell for $516 each. Costs 1. Plastic for casing-$19,000 2. Wages of assembly workers--$90,000 3. Property taxes on factory-$7,000 4. Accounting staff salaries-$33,000 5. Drum stands (1.000 stands purchased)-$35,000 6. Rent cost of equipment for sales staff-$36.000 7. Upper management salaries-$170,000 8. Annual flat fee for factory maintenance service--$16,000 9. Sales commissions-$25 per unit 10. Machinery depreciation, straight-line-$42,000

Answer 1

(i) New selling prie= $516-10%=$464.4

Old contirbution

Sales = $516000

(-) Variable cost

Plastic for casing $19000

Wages of assembly workers $90000

Drum stands $35000

Sales commission (1000*25) $25000

Total variable cost ($169000)

Contribution $347000

Contribution per unit $ 347

Total Variable cost per unit $169000/1000=$169

(ii) New contribution margin per unit =

New sales price per unit $ 464.4

(-) Variable cost per unit ($169)

New contribution per unit $ 295.4

Profit  formula =(new sales price per unit - variable cost)-Fixed cost=Profit

b) No of units to be sold to make the same operating profit =Old profit +fixed cost/newcontribution per unit

=43000+304000/295.4

=1175 units approx

c) break even sales =fixed cost/new contribution per unit

=$304000/295.4

=1029 units approx

d) if true beat company can sell 20% more units with decreased selling price how much operating profit will they make

Total units= (2*1000)=2000 units

Total New Contribution =$295.4*2000=$5,90,800

(-) Fixed Cost =($304000)

Operating income =$286800

True beat should mostly not consider to reduce  their price if they estimate that their sales would not increase, because with a reduction of price they have to sell more units than usual to break even ,which is a risky factor.There is a huge burden to produce more.But consideringly if they can sell 2 times original units then only its a bright idea to reduce selling price.Selling 2 times more units increases profit.