P17-28. Multiple Changes in Profit Plans

In an attempt to improve profit performance, Anderson Company's management is considering a number of alternative actions. An October contribution income statement for Anderson Company follows.

ANDERSON COMPANY

Contribution Income Statement

For Month of October

Sales (12,000 units x $75) $900,000

Less variable costs

Direct materials (12,000 units x $10) $120,000

Direct Labor (12,000 units x $75) 120,000

Variable factory overhead (12,000 units x $4) 48,000

Selling and administrative (12,000 units x $2) 24,000 (312,000)

Contribution margin (12,000 units x $49) 588,000

Less fixed costs

Factory overhead 360,000

Selling and administrative 240,000 (600,000)

Net Income (loss) $ (12,000)

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 $4 per unit

and increase variable overhead costs by $1 per unit and fixed factory overhead by $12,000 per

month.

b. Reducing the selling price by $5 per unit. This should increase the monthly sales by 3,000 units.

At this higher volume, additional equipment and salaried personnel would be required. This will

increase fixed factory overhead by $4,000 per month and fixed selling and administrative costs by

$1,800 per month.

c. Buying rather than manufacturing a component of Anderson's final product. This will increase

direct materials costs by $5 per unit. However, direct labor will decline $3 per unit, variable factory

overhead will decline $1 per unit, and fixed factory overhead will decline $25,000 per month.

d. Increasing the unit selling price by $5 per unit. This action should result in a 2,000-unit decrease in

monthly sales.

e. Combining alternatives (a) and (d).