1.2) John’s Camera is currently selling cameras at a price of $100. The cameras
ID: 2665790 • Letter: 1
Question
1.2) John’s Camera is currently selling cameras at a price of $100. The cameras have a variable cost of $75 per camera and John’s Camera has a total fixed cost of $100,000. John’s Camera is currently selling 5,000 units of cameras. John’s Camera is considering changing its production process. With the change in production, John’s Camera will lower its fixed to $80,000 but raise its variable costs to $90 per unit. Should John’s Camera go forward with the change in production process?Yes, because the new production process lowers fixed costs by $20,000.
Yes, because the new production process raises the contribution margin.
No, because the new production process leads to a decline in profits by $55,000.
No, because the new production process raises the variable costs by $15 per unit.
Explanation / Answer
1.2) John’s Camera is currently selling cameras at a price of $100. The cameras have a variable cost of $75 per camera and John’s Camera has a total fixed cost of $100,000. John’s Camera is currently selling 5,000 units of cameras. John’s Camera is considering changing its production process. With the change in production, John’s Camera will lower its fixed to $80,000 but raise its variable costs to $90 per unit. Should John’s Camera go forward with the change in production process? Current Process : Cont pu = 100-75 = 25 For 5000 units, Total cont = 5000*$25 = $125,000 Less Fixed costs $100,000 ------------------------------------ Gross Profit $25000..................(A) New process : Cont pu = 100-90 = 10 For 5000 units, Total cont = 5000*$10 = $50,000 Less Fixed costs $80,000 ------------------------------------ Gross Loss ($30000)..................(B) Thus a increase in Var cost has reduced contribution which has impacted profits. This has also moved the BEP upwards. Correct option : No, because the new production process raises the variable costs by $15 per unit.
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