Oriole Corp is considering a major reorganization to reduce costs. The reorganiz

Question

Oriole Corp is considering a major reorganization to reduce costs. The reorganization will do two things: 1. Reduce labor (Variable Costs) by 20% 2. Increase fixed costs (MOH) by $50,000 per year You are the CFO and must determine whether to reorganize or not. Current Situation: Sales Revenues 50,000 units Differential Analysis (Short Form) $200 Selling price Costs Estimated cost savings: Direct Material $40 per unit Reduced labor: Direct Labor Estimated increased costs: Number of workers 10 Workers New fixed costs: Total DL Hours 2000 Hours Difference: Hourly wage rate $16 per hour Difference: Manufacturing Overhead (fixed) $500,000 Marketing Costs (fixed) $1,000,000 Required: Use Differential Analysis to determine whether the company should reorganize or not.   Conclusion Quantify and show your work. Change in income: Go for it: Yes or No Oriole Corp is considering a major reorganization to reduce costs. The reorganization will do two things: 1. Reduce labor (Variable Costs) by 20% 2. Increase fixed costs (MOH) by $50,000 per year You are the CFO and must determine whether to reorganize or not. Current Situation: Sales Revenues 50,000 units Differential Analysis (Short Form) $200 Selling price Costs Estimated cost savings: Direct Material $40 per unit Reduced labor: Direct Labor Estimated increased costs: Number of workers 10 Workers New fixed costs: Total DL Hours 2000 Hours Difference: Hourly wage rate $16 per hour Difference: Manufacturing Overhead (fixed) $500,000 Marketing Costs (fixed) $1,000,000 Required: Use Differential Analysis to determine whether the company should reorganize or not.   Conclusion Quantify and show your work. Change in income: Go for it: Yes or No

Explanation / Answer

for this we need to find out our profit ..

for profit = total earning - total expense ..

so we go with 2 cases .

case 1: as per given data ..

total earning=total unit *selling price= 50000*200=$10,000,000

total expense :direct material unit*number of unit +total dl hours*hourly wages rate +manufacture overhead +marketing costs .

=40*50,000+2000*16+500,000+10,00,000

=20,00,000+32000+15,00,000

=$3732000

so total profit 10,000,000-3732000=$6268000

case 2 :reduce labour by 20% means total dl hours reduce from 2000 to 1600

and increase fixed costs :50000

so overall changes is .:1600*16=25600

but increase wages :50000

so total expense increase :50000-25600

=$24400

similarly every time our expense inc with reducing labor .

if any doubt then please comment

which shows that profite reduce by $24400

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