Question: Multiple Changes in Profit Plans In an attempt to improve profit performance, Anderson Companys management is considering a number of alternative actions. An October contribution
Multiple Changes in Profit Plans In an attempt to improve profit performance, Anderson Companys management is considering a number of alternative actions. An October contribution income statement for Anderson Company follows.
| ANDERSON COMPANY | |||||
|---|---|---|---|---|---|
| Contribution Income Statement | |||||
| For Month of October | |||||
| Sales | ( | 24,000 | units x $75) | $1,800,000 | |
| Less variable costs | |||||
| Direct materials | ( | 24,000 | units x $10) | $240,000 | |
| Direct labor | ( | 24,000 | units x $10) | 240,000 | |
| Variable factory overhead | ( | 24,000 | units x $4) | 96,000 | |
| Selling and administrative | ( | 24,000 | units x $2) | 48,000 | (624,000) |
| Contribution margin | ( | 24,000 | units x $49) | 1,176,000 | |
| Less fixed costs | |||||
| Factory overhead | 720,000 | ||||
| Selling and administrative | 480,000 | (1,200,000) | |||
| Net income (loss) | $(24,000) | ||||
Required Determine the effect of each of the following independent situations on monthly profit. Note: Do not use negative signs with your answers. a. Purchasing automated assembly equipment, which should reduce direct labor costs by $4 per unit and increase variable overhead costs by $1 per unit and fixed factory overhead by $24,000 per month. Answer Increase of Decrease of
$Answer
b. Reducing the selling price by $5 per unit. This should increase the monthly sales by 6,000 units. At this higher volume, additional equipment and salaried personnel would be required. This will increase fixed factory overhead by $8,000 per month and fixed selling and administrative costs by $3,600 per month. AnswerIncrease ofDecrease of
$Answer
c. Buying rather than manufacturing a component of Andersons final product. This will increase direct materials costs by $5 per unit. However, direct labor will decline $3 per unit, variable factory overhead will decline $1 per unit, and fixed factory overhead will decline $50,000 per month. AnswerIncrease ofDecrease of
$Answer
d. Increasing the unit selling price by $5 per unit. This action should result in a 4,000 unit decrease in monthly sales. AnswerIncrease ofDecrease of
$Answer
e. Combining alternatives (a) and (d). AnswerIncrease ofDecrease of
$Answer
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