Lancer Audio produces a high end DVD player that sells for $1,250. Total operati

Question

Lancer Audio produces a high end DVD player that sells for $1,250. Total operating expenses for July were as follows:

Units produced and sold 140
Component cost $67,000
Supplies 1,680
Assembly Labor 23,500
Rent 2,200
Supervisory salary 5,500
Electricity 250
Telephone 180
Gas 200
Shipping 1,540
Advertising 2,500
Administrative Costs 14,500
Total $119,050

Required:

A. Use account analysis to determine fixed cost per month and variable cost per DVD player.
B. Project total cost for August assuming production and sales of 160 units.
C. What is the contribution margin per DVD player?
D. Estimate total profit assuming production and sales of 160 units.
E. Lancer Audio is considering an order for 100 DVD players, to be produced in the next 10 months, from a customer in Canada. The selling price will be $900 per unit (well under the normal selling price). However, the Lancer Audio brand name will be attached to the product. What will be the impact on company profit associated with this order?

Explanation / Answer

a) According to the given information, Component cost is mixed cost Supplies is variable cost Assembly labor is variable cost Rent is fixed cost Supervisor salary is a fixed cost Electricity and telephone cost are fixed Gas is a variable cost Shipping is a variable cost Advertising and Administrative costs are fixed. a) Fixed costs per month: Fixed costs per month = Rent + Salary + Electricity + Telephone + Advertising + Administrative costs                                    = $2200 + $5500 + $250 + $180 + $2500 + $14500                                    = $25,130 Variable cost = Supplies + Assembly labor + Gas + Shipping                      = $26,920 Variable cost per DVD = $26,920 / 140                                     = $192 b) The sales units has increased from 140 to 160 units where there is a 14.3% increase in the number of units. Total cost = $119,050 (1.143)                 = $136,074 c) Contribution margin per DVD player: CM = Selling price per DVD - Variable cost per DVD        = $1,250 - $192        = $1,058 d) Total profit : Sales ($1250 * 160)                               $200,000 (-) Variable cost                                       $30,720 --------------------------------------------------- Contribution margin                                $169,280 (-) Fixed costs                                        $25,130 ----------------------------------------------------- Total profit                                             $144,150 ----------------------------------------------------- e) Sales ($900 * 100)                               $90,000 (-) Variable cost                                    $19,200 --------------------------------------------------- Contribution margin                                $70,800 (-) Fixed costs                                        $25,130 ----------------------------------------------------- Total profit                                             $45,670 ----------------------------------------------------- Sales ($900 * 100)                               $90,000 (-) Variable cost                                    $19,200 --------------------------------------------------- Contribution margin                                $70,800 (-) Fixed costs                                        $25,130 ----------------------------------------------------- Total profit                                             $45,670 ----------------------------------------------------- Therefore, the profit reduces as the fixed costs become high for less number of units. If the company's brand name is attached to the DVD players, then there is a danger that the company may go into loss.

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