Glass company manufactures glasses that it sells to mail-order distributors.

Sales price per pair of glasses: $60

Manufacturing and other costs follow:

Variable Cost per unit

Direct Materials $13

Direct labor 12

Factory overhead 2

Distribution 3

Total Variable costs $30

Fixed costs per month

Factory overhead $20,000

Selling and Administrative 10,000

Total Fixed costs $30,000

Current monthly production and sales volume 5,000 units

Monthly capacity 6,000 units

Additional information:The variable distribution costs are for transportation to mail-order distributors.

Required:Determine the effect of each of the following independent situations on monthly profits. Make sure you show you work and give a recommendation to management if they should accept the change.

#1 A $2 increase in the unit selling price should result in a 1,200-unit decrease in monthly sales

#2 A10% 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 thedirect labor costs increasing by 60%.

#3 a British distributor has proposed to place a special one-time order for 1,000 units at a reduced price of $55 per unit.The distributor would pay all transportation costs, so there are no variable distribution costs.There would be additional fixed selling and administrative costs of $2,000.

Solution:

#1

#2

#3