Question

This year burchard company sold 40,000 units of its only product for $25 per unit. manufacturing and selling the product required $200,000 of fixed manufacturing costs and $325,000 of fixed selling and administrative costs. its per unit variable costs follow. material $ 8.00 direct labor (paid on the basis of completed units) 5.00 variable overhead costs 1.00 variable selling and administrative costs 0.50 next year the company will use new material, which will reduce material costs by 50% and direct labor costs by 60% and will not affect product quality or marketability. management is consider

Answer 1

Answer:

Profit using old material $ 8895,000

Profit using new material     $ 9175,000

Explanation:

Taking the two alternatives given the profitability of the firm increases by

$ 280,000. When the new material does not affect product quality or marketability  management should use it.

Burchard Company

Sales      40,000*$25=   $ 10,000,000

Variable Costs

Material = $ 8* 40,000= $ 320,000

Direct Labor= $ 5.00 * 40,000= $ 200,000

Variable Overhead Costs = $ 1 * 40,000= $ 40,000

Variable Selling & Administrative Costs = $ 0.5 * 40,000= $ 20,000

Contribution Margin = 9420,000

Fixed Manufacturing Costs and $200,000

Fixed Selling and Administrative costs$325,000

Profit                    $ 8895,000

Burchard Company

Sales      40,000*$25=   $ 10,000,000

Variable Costs

Material = $ 4* 40,000= $ 160,000

Direct Labor= $ 2.0 * 40,000= $ 80,000

Variable Overhead Costs = $ 1 * 40,000= $ 40,000

Variable Selling & Administrative Costs = $ 0.5 * 40,000= $ 20,000

Contribution Margin = 9700,000

Fixed Manufacturing Costs and $200,000

Fixed Selling and Administrative costs$325,000

Profit                    $ 9175,000