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 481,000 sprinkler units at an average selling price of $25.20. The manufacturing costs are $5,811,160 variable and $2,155,660 fixed. Selling and administrative costs are $2,673,680 variable and $798,370 fixed. If Waterways begins mass-producing its special-order sprinklers, how would this affect the company

Question

contestada

Respuesta :

anthougo anthougo · Answer 1 · 2021-06-24T05:15:27+02:00

Answer:

Waterways Corporation

If Waterways begins mass-producing its special-order sprinklers, its net operating income would almost double, increasing by $680,202.

Explanation:

a) Data and Calculations:

Increase in variable costs per unit = $0.70

Increase in number of sprinklers sold = 10%

Increase in average sales price = $0.20

Current sales = 481,000 sprinkler units

Selling price = $25.20

New selling price = $25.40 ($25.20 + $0.20)

New quantity of sprinkler units = 529,100 (481,000 * 1.1)

Increase in variable cost = $370,370 (529,100 * $0.70)

New variable cost = $6,181,530 ($5,811,160 + $370,370)

Income Statements Normal Mass Production

Sales revenue $12,121,200 $13,439,140

Variable manufacturing costs $5,811,160 $6,181,530

Variable selling and admin. costs 2,673,680 2,941,048

Total variable costs $8,484,840 $9,122,578

Contribution margin $3,636,360 $4,316,562

Fixed costs:

Manufacturing costs $2,155,660 $2,155,660

Selling and administrative costs 798,370 798,370

Total fixed costs $2,954,030 $2,954,030

Net operating income $682,330 $1,362,532

Increase in net operating income = $680,202 ($1,362,532 - $682,330)