A factory producing electric power protectors operates at 65% of Its capacity an

Question

A factory producing electric power protectors operates at 65% of Its capacity and produces 22,800 units per year. The unit manufacturing cost is computed as follows: Direct labor cost $21.25 Direct material cost $15.75 Overhead $11.00 The protectors are marketed through a factory distributor for $56.75 each. It is anticipated that the volume of production can be increased to 30,000 units per year if the price is lowered to $46.50 per unit. This action would not increase the present total overhead cost. Compute the present profit per year and the profit per year if the volume of production is increased.

Explanation / Answer

the present profit condition=

contribution per unit= 56.75- (21.25+15.75+11)= 56.75- 48= 8.75

total profit= 22800*8.75= $199,500

if the production increases to 30,000 units, then

the total overhead cost= 11*22800= 250800

direct labor cost and material cost= 21.25+15.75= 37

total cost= 37*30000+ 250800= $1,110,000+250800= $1360,800

total revenues= $46.5*30000= 1,395,000

total profit= total revenues- total cost

= $1,395,000- 1,360,800= $34200

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