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?

Explanation / Answer

Details For 144 Windows For 200 windows AnaDifference Sales $20,160 25,000 $4,840 Variable costs: Material(4,800/120=40) 5,760 8,000 2,240 Labor (3,000/120=25) 3,600 5,000 1,400 Total variable cost 9,360 13,000 3,640 Contribution margin 10,800 12,000 1,200 Fixed costs: Rent 1,500 1,500 0 depreciation 2,500 2,500 0 Other fixed costs 3,200 3,200 0 Total fixed cost 7,200 7,200 Net operating income 3,600 4,800        1,200 Fixed expenses will remains unchanged . To increase the sales revenue , the companyis considereing lower the price , inorder to increase sales. The another situation may be to reduce the inventory levels.

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