Wonder T Manufacturing Company produces lanterns. The firm has not been as profitable as expected in the past three years. As a result, it has excess capacity that could be used to produce an additional 20,000 lanterns per year. However, any production above that amount would require a capital investment of $100,000. Operating results for the previous year are shown here. Assume that there is never any ending inventory.

Required:
Respond to the following independent proposals, and support your recommendations:
1. The production manager believes that profits could be increased through the purchase of more automated production machinery, which would increase fixed costs by $100,000 and reduce the variable costs by $2.00 per lantern. Is she correct if sales are to remain at 31,250 lanterns annually?
2. The sales manager believes that a 10% discount on the sales price would increase the sales volume to 40,000 units annually. If he is correct, would this action increase or decrease profits?
3. Would the implementation of both proposals be worthwhile?
4. The sales manager believes that an increase in sales commissions could improve the sales volume. In particular, he suggests that an increase of $2.50 per lantern would increase the sales volume 30%. If he is correct, would this action increase profits?
5. The accountant suggests another alternative: Reduce administrative salaries by $15,000 so that prices can be reduced by $0.50 per unit. She believes that this action would increase the volume to 35,000 units annually. If she is correct, would this action increase profits?
6. The corporate executives finally decide to spend an additional $42,000 on advertising to bring the sales volume up to 34,050 units. If the increased advertising can bring in these extra sales, is this a gooddecision?

Transcribed Image Text:

Sales revenue (31,250 lantems x S40). Variable costs (31,250 lanterns x $25) Fixed costs.. S1,250,000 $781,250 400,000 1,181,250 S 68,750 Profit