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 Waterways begins mass-producing its special-order sprinklers, how would this affect the company?

Explanation / Answer

If Waterways begins mass-producing its special-order sprinklers, the changes are:

Increased Sales volume to = 491740 * 1.10 = 540914

Increased in selling price = $26.50 + $0.20 = $26.70 per unit

Increase in variable cost = (6863512 + 2651657) + 0.70 * 540914 = $ 9893808.80

The earnings of the company increased from $670,851 to $1,703,505, if Waterways begins mass-producing its special-order sprinklers

Particulars Pre-change $ Effect of change Post-change $ SALES 13,031,110 540914 * $26.70 14,442,403.80 Less: Manufacturing, selling and administrative variable costs 9,515,169 9,893,808.80 Less: Manufacturing fixed costs 2050140 2050140 Less: Selling and administrative fixed costs 794950 794950 EARNINGS (BEFORE AND AFTER CHANGE) $670,851 $1,703,505

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