10 5 The Yardman Company produces electric weed trimmers, among other products. The following standard costs per unit are associated with the trimmers points Item Direct materials Direct labour. Neflook Variable overhead Fixed overhead Total References Quantity 4 pieces at $6.00 2 hours at $15.00 Cost per Unit $24.00 30.00 2 hours at $3.00 2 hours at $5.00 6.00 10.00 $70.00 Normal activity of 60.000 hours was used as the denominator level. Other possible capacity levels were as follows: Expected annual Practical annual Theoretical annual 55,000 hours 75,000 hours 100,000 hours An analysis of the difference between practical and theoretical capacity for the past year showed the following: 10.000 hours were not used because management decided not to employ two crews of workers. A further 5,000 hours of capacity had to be assigned to setup when machines were switched from one product to another. Another 5,000 hours were not used because scheduled maintenance of production equipment was required. Finally, the remaining 5,000 hours of theoretical capacity were not used because existing markets could not use all of the theoretical capacity without a substantial reduction in selling price. Management approached the Marketing Department to determine what pricing policy would be needed to move from the denominator level of activity (30.000 units) to practical capacity (37,500 units). Marketing suggested that a price reduction of 10% below the existing selling price of $80 would increase demand from 30,000 units to 37,500 units. moun from practical capacity 37.500 units) to theoretical capacity (50.000 units), two crews would hours 10 points eflook References An analysis of the difference between practical and theoretical capacity for the past year showed the following: 10.000 hours were not used because management decided not to employ two crews of workers. A further 5,000 hours of capacity had to be assigned to setup when machines were switched from one product to another. Another 5,000 hours were not used because scheduled maintenance of production equipment was required. Finally, the remaining 5,000 hours of theoretical capacity were not used because existing markets could not use all of the theoretical capacity without a substantial reduction in selling price. Management approached the Marketing Department to determine what pricing policy would be needed to move from the denominator level of activity (30.000 units) to practical capacity (37,500 units). Marketing suggested that a price reduction of 10% below the existing selling price of $80 would increase demand from 30,000 units to 37.500 units. Marketing also indicated that to move from practical capacity (37,500 units) to theoretical capacity (50.000 units), two crews would need to be hired, setups eliminated, and maintenance deferred. A further 10% price reduction below the existing $80 would also be needed to increase demand by another 12.500 units. Required: Calculate gross profit at the following levels of capacity utilization: (a) expected annual, (b) denominator, (c) practical, and (d) theoretical. Note: Be sure to incorporate the selling price reductions necessary to sell all units produced at practical and theoretical levels of capacity utilization. Sales Quantity Sales Price Total Sales Cost of Sales Material $24 Capacity Expected Annual Denominator Practical Theoretical 10 points 5 DUOK References Marketing also indicated that to move from practical capacity (37,500 units) to theoretical capacity (50,000 units), two crews would need to be hired, setups eliminated, and maintenance deferred. A further 10% price reduction below the existing $80 would also be needed to increase demand by another 12.500 units. Required: Calculate gross profit at the following levels of capacity utilization: (a) expected annual, (b) denominator. (c) practical, and (d) theoretical. Note: Be sure to incorporate the selling price reductions necessary to sell all units produced at practical and theoretical levels of capacity utilization. Capacity Expected Annual Denominator Practical Theoretical Sales Quantity Sales Price Total Sales Cost of Sales Material $24 Direct labour $30 Variable overhead $6 Foxed overhead $10 Gross profit