Waterways is thinking of mass-producing one of its special-order sprinklers. To

Question

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 491,740 sprinkler units at an average selling price of $26.50. The manufacturing costs are $6,863,512 variable and $2,050,140 fixed. Selling and administrative costs are $2,651,657 variable and $794,950 fixed.

If management wanted to increase its income from this product by 10%, how many additional units would have to be sold to reach this income level?

Explanation / Answer

Increase in sales level

sales (540914 unit * $26.7) 14442404

less: Total variable cost [540914 * ($19.35+$0.70)] 10845326

less: Total fixed cost ($2,050,140 +  $794,950) 2845090

Net operating income $751988

additional units would have to be sold:

Increase in income

= New sales level's profit - current sales level's profit

= $751988 -    $670851

=81137

increase in units = 491740 / 670851 * 81137

= 59474 units

Note:- new sales unit = 491740 + 10% * 491740

   =540914 unit

sales price per unit = $26.50 + $0.20

   = $26.7

Variable cost

Total Variable (manufacturing cost+ Selling administrative) cost per unit = (6863512 + 2651657) /491740 units

=$9515169 / 491740

  =$19.35 per unit

Current sales level

   Sales(491740 units * $26.5) 13031110

less: variable cost(6,863,512 +$2,651,657)   9515169

less: Fixed cost (2050140 + 794950) 2845090

   Net operating income $670851

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