Shareef’s Window Company is in the process of preparing a production cost budget

Question

Shareef’s Window Company is in the process of preparing a production cost budget for August. Actual costs in July for 120 windows were:
Materials cost $ 4,800
Labor cost 3,000
Rent 1,500
Depreciation 2,500
Other fixed costs 3,200
Total $15,000

The company is currently producing and selling 144 windows annually and each window is sold for $140.00. The company is considering lowering the price to $125.00 for which management estimates this will increase sales to 200 windows. Materials and labor are the only variable costs. Under what situation should the company lower the price of its windows?
A. If total revenue exceeds totals costs under the new pricing
B. If incremental revenue exceeds the old revenue
C. If incremental profit is a positive number
D. If incremental costs decrease

Explanation / Answer

Present Estimated Net affect Revenue (144 units x $140) = 20,160 (200 units x $125) = $25,000 4,840 Less: Incremental costs: Material cost                   = 5,760 (40 * 200)    = 8,000 2240 Labor cost                       = 3,600 (25 * 200)     = 5,000 1,400 Rent                                = 1,500                      = 1,500 0 Depreciation                     = 2,500                      = 2,500 0 Other fixed costs              = 3,200                      = 3,200 0 Total cost                       = 16,560                      = 20,200 -3640 Net benefit $1,200 When the total revenue exceeds totals costs under the new pricing only the company can lower the price of the windows. (4,840 - 3,640 = $1,200) Present Estimated Net affect Revenue (144 units x $140) = 20,160 (200 units x $125) = $25,000 4,840 Less: Incremental costs: Material cost                   = 5,760 (40 * 200)    = 8,000 2240 Labor cost                       = 3,600 (25 * 200)     = 5,000 1,400 Rent                                = 1,500                      = 1,500 0 Depreciation                     = 2,500                      = 2,500 0 Other fixed costs              = 3,200                      = 3,200 0 Total cost                       = 16,560                      = 20,200 -3640 Net benefit $1,200

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