HJM Auto Parts makes a muffler/pipe assembly for a cost of P45 each (P10.00 fixed and P35.00 variable), which it then sells for P68.00. The opportunity exists to modify this assembly (to a more fuel-efficient model) for additional direct materials and labor cost totaling P5.000 per unit. The new muffler/pipe model is expected to sell for P80.00 each. Variable selling and distribution costs would be the same at P10.00 per unit. Projected sales volume is 60,000 units per year for the new model, the same level of sales as for the current assembly. Labor resources are very tight at present but machine capacity is underutilized.

QUESTIONS:

1. Should HJM modify the existing assembly (YES or NO?) (#1) _________

2. The (increase or decrease?) (#2) _________ in annual operating profit if HJM modifies the assembly is (#3) _____________.

3. If it will take 1.5 times to process the fuel-efficient model (in labor hours) than the traditional model, the differential contribution margin per hour would be (rounded to two decimal places) (#4) P____________ in favor of (traditional or fuel-efficient?) (#5) ____________ model.