Question

Sales total 50,000 units a year. The statues are finished either rough or polished, with an average demand of 60% rough and 40% polished. Iron ingots, the direct material, costs $5 per pound. Processing costs are $300 to convert 30 pounds into 60 statues. Rough statues are sold for $17 each, and polished statues can be sold for $19 or engraved for an additional cost of $5. Polished statues can then be sold for $23.50. How much would the profits/unit increase by if the Company should engrave the statues?

Answer 1

Answer:

It is more profitable to not engrave the statues.

Explanation:

Giving the following information:

Sales= 50,000 units

Polished= 40% of sales

Direct material= $5 per pound

Processing= $300 to convert 30 pounds in 60 statues

Polish= $19 per unit

Engraved= $5 per unit

New selling price= $23,5

We need to determine whether it is more convenient to sell the units engraved or not.

First, we need to calculate the unitary cost of a polished unit.

The total cost of 60 units= 5*30 + 300= $450

Unitary cost (normal)= 450/60= $7.5

Unitary cost (engraved)= 7.5+5= $12.5

Total sales= 50,000*0.4= 20,000 units

Now, we can determine the total contribution margin of both options:

Sell as-is:

Total contribution margin= 20,000*(19-7.5)= $230,000

Engrave:

Total contribtuion margin= 20,000*(23.5 - 12.5)= $220,000

It is more profitable to not engrave the statues.