Multiple Changes in Profit Plans (LO1, 2, 3)

In an attempt to improve profit performance, Jacobson Company’s management Is considering a number of alternative actions. An August 2012 contribution income statement for Jacobson Company follows.

JACOBSON COMPANY Contribution Income Statement For Month of August 2012 Sees (ICO wmaitis % SYvO), cpocdoncacusacecaace $400,000 Less variable costs Direct materials (10,000 units x $5)............ $ 50,000 Directiabon (OOOO Unitse< $14) 1 ee eee 140,000 Variable factory overhead (10,000 units x $6).... 60,000 Selling and administrative (10,000 units x $5).... 50,000 (300,000)

Contribution margin (10,000 units x $10) ......... 100,000 Less fixed costs Factory, Overnead tras sis a waves «oie sine meee 50,000 Sellingrandiadministhativennes setae se eerie 60,000 (110,000)

Netiincomen(lOSS) aa neuen aes ice aces $ (10,000)

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

a. Purchasing automated assembly equipment, which should reduce direct labor costs by $5 per unit and increase variable overhead costs by $2 per unit and fixed factory overhead by $22,000 per month.

b. Reducing the selling price by $5 per unit. This should increase the monthly sales by 5,000 units.

At this higher volume, additional equipment and salaried personnel would be required. This will increase fixed factory overhead by $2,800 per month and fixed selling and administrative costs by

$2,500 per month.

c. Buying rather than manufacturing a component of Jacobson’s final product. This will increase direct materials costs by $12 per unit. However, direct labor will decline $4 per unit, variable factory overhead will decline $1 per unit, and fixed factory overhead will decline $15,000 per month.

d. Increasing the unit selling price by $4 per unit. This action should result in a 1,000-unit decrease in monthly sales.

e. Combining alternatives

(a) and (d).