Applications of Differential Analysis

Moscot manufactures high$-$end sunglasses that it sells in retail shops and online for $$310,$ on average. Assume the following represent manufacturing and other costs.

Variable Costs per Unit Fixed Costs per Month

Direct materials $$80$ Factory overhead $$450,000$

Direct labor $50$ Selling and administrative $375,000$

Factory overhead $35$ Total $$825,000$

Distribution $10$

Total $$175$

The variable distribution costs are for transportation to retail partners. Assume the current monthly production and sales volume is $15,000$ units. Monthly capacity is $20,000$ units.

Required

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

Note: Do not use negative signs with your answers.

a$.$ A $$50$ increase in the unit selling price should result in a $2,000$ unit decrease in monthly sales.

Answer

Increase of

$Answer

$380,000$

b$.$ A $10\%$ decrease in the unit selling price should result in a $6,000$ unit increase in monthly sales. However, because of capacity constraints, the last $1,000$ units would be produced during over$-$time with the direct labor costs increasing by $50\%.$

Answer

Increase of

$Answer

$0$

c$.$ A British distributor has proposed to place a special, one$-$time order for $1,000$ units at a reduced price of $$250$ per unit. The distributor would pay all transportation costs. There would be additional fixed selling and administrative costs of $$750.$

Answer

Increase of

$Answer

d$.$ A Swiss distributor has proposed to place a special, one$-$time order for $6,000$ units at a special price of $$250$ per unit. The distributor would pay all transportation costs. There would be additional fixed selling and administrative costs of $$1,000.$ Assume overtime production is not possible.

Answer

Increase of

$Answer

$0$

e$.$ Assume Moscat 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 $$10$ per unit. If Moscat accepts the offer, it will be able to reduce variable manufacturing costs by $5\%,$ reduce fixed costs by $$5,000,$ and rent out some freed$-$up space for $$4,000$ per month.

Answer

Advantage of making

$Answer

$0$

f$.$ The glasses also come with a choice of lens tint. Assume that eliminating that option would reduce variable costs by $$5$ and eliminate $$50,000$ in fixed factory overhead. The selling price would likely have to decrease to $$290$ per unit.

Answer

Decrease of

$Answer

$0$