Plum Company's income statement for the last is as follows: Sales (2,500 units $16) $40,000 Less

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Question:

Plum Company's income statement for the last is as follows:

Sales (2,500 units × $16) $40,000

Less variable expenses:

Cost of goods sold:

Direct materials $7,500

Direct labor 6,000

Variable factory overhead 7,500

Selling and administrative 1,250 22,250

Contribution margin $17,750

Less fixed expenses:

Factory overhead $5,000

Selling and administrative 7,500 12,500

Net income (loss) $ 5,250

In an attempt to improve the company's profit performance, management is considering a number of alternative actions.

Determine the effect of each of the following on monthly profit. Each situation is to be evaluated independently of all the others.

a. Purchasing automated assembly equipment: This action should reduce direct labor costs by 50 percent. It also will increase variable overhead costs by 10 percent and fixed factory overhead by $1,250.

b. Reducing the unit selling price by $1 per unit: This should increase the monthly sales by 2,500 units. Fixed factory overhead will increase by $750.

c. Increase fixed selling and administrative expenses by $500 for advertising costs. The number of units sold will increase to 4,000 units.