The unit product costs at a normal level of 5,000 units per month and selling pr
ID: 2453504 • Letter: T
Question
The unit product costs at a normal level of 5,000 units per month and selling price of $90 are as follows:
Manufacturing costs:
Direct materials............................................... $ 35
Direct labor...................................................... 12
Variable overhead............................................ 8
Fixed overhead (total for year = $300,000)...... 5
Selling and Admin costs:
Variable............................................................ $ 15
Fixed (total for year = $480,000)...................... 8
This product is sold at a rate of 60,000 units per year.
It is predicted that a price increase to $98 will decrease volume by 10%.
An advertising campaign is proposed to support the price increase.
How much can advertising expense be spent to support the price increase and without having operating income fall below the current levels?
Explanation / Answer
Statement showing calculation of current income
Proposed increase in Selling price = $98/unit
Resultant decrease in production = 10%X60000 = 6000 units
Revised income = 54000(98-35-12-8-15) - 300000 - 480000
= $732000
Maximum amount that can be spent on advertising so as to manitain the current level of income of $420000 is $312000 (i.e., $732000-$420000).
Pariculars Amount Sales (60000x90) $5400000 Less Material cost (60000x$35) $2100000 Less: labour cost (60000x$12) $720000 Less: Variable Overhead(60000x$8) $480000 Less: Variable selling and admin Exp.(60000x$15) $900000 Less: Fixed overhead $300000 Less: Fixed selling and admin expenses $480000 Net inome $420000Related Questions
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