Applications of Differential Analysis (LO1, 2, 3)

Nantucket Optics Company manufactures high-end sunglasses that it sells to mail-order distributors for

$50. Manufacturing and other costs follow:

_ Variable Costs per Unit Fixed Costs per Month Direct materials ......... $ 8 Factory overhead.......... $20,000 DirectilabOhee sy rusct sc 7 Selling and administrative ... 10,000 Factory overhead........ 2... Total <;.8sen ieee $30,000 DIStHDUTONPeewasicimeics - 3 SSS lichelhs suns oa ce aoe Tome $20 The variable distribution costs are for transportation to mail-order distributors. The current monthly production and sales volume is 5,000 units. Monthly capacity is 6,000 units.

Required Determine the effect of each of the following independent situations on monthly profits.

a. A $2.00 increase in the unit selling price should result in a 1,200-unit decrease in monthly sales.

b. A 15% decrease in the unit selling price should result in a 2,000-unit increase in monthly sales. However, because of capacity constraints, the last 1,000 units would be produced during overtime with the direct labor costs increasing by 60 percent.

c. A British distributor has proposed to place a special, one-time order for 1,000 units at a reduced price of $45 per unit. The distributor would pay all transportation costs. There would be additional fixed selling and administrative costs of $1,000.

d. A Swiss distributor has proposed to place a special, one-time order for 2,500 units at a special price of $45 per unit. The distributor would pay all transportation costs. There would be additional fixed selling and administrative costs of $1,500. Assume overtime production is not possible.

e. Nantucket Optics provides a designer case for each pair of sunglasses that it manufactures. A Chinese manufacturer has offered a one-year contract to supply the cases at a cost of $4 per unit.

If Nantucket Optics accepts the offer, it will be able to reduce variable manufacturing costs by 10%, reduce fixed costs by $1,500, and rent out some freed-up space for $2,000 per month.

f The glasses also come with four different color inserts that allow the user to change the appearance of the glasses to match her or his clothing. Making the glasses in only one color without the color inserts would reduce the cost by $5, and Nantucket Optics believes the selling price would have to decrease to $45.