Answer:
Plan 2 is the best.
Explanation:
Giving the following information:
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 5.00
Variable overhead costs 1.00
Variable selling and administrative costs 0.50
Next year the company will use a new material, which will reduce material costs by 50% and direct labor costs by 60% and will not affect product quality or marketability.
Direct material= 4
Direct labor= 2
Plan 1:
Sales= 40,000*25= 1,000,000
Variable costs= (4+2+1+0.5)*40,000= 300,000 (-)
Contribution margin= 700,000
Fixed costs= 525,000 (-)
Net operating income= 175,000
Plan 2:
Sales= 36,000*(25*1.2)= 1,080,000
Variable costs= 270,000
Contribution margin= 810,000
Fixed costs= 525,000 (-)
Net operating income= 285,000
Plan 2 is the best.
