The Vice President for Sales and Marketing at Waterways Corporation is planning for production needs to meet sales demand in the coming year. He is also trying to determine how the companys profits might be increased in the coming year. This problem asks you to use cost-volume-profit concepts to help Waterways understand contribution margins of some of its products and decide whether to mass-produce any of them. Waterways markets a simple water control and timer that it mass-produces. Last year, the company sold 720,000 units at an average selling price of $4.70 per unit. The variable costs were $2,030,400, and the fixed costs were $879,840.

Waterways is thinking of mass-producing one of its special-order sprinklers. To do so would increase variable costs for all sprinklers by an average of $0.70 per unit. The company also estimates that this change could increase the overall number of sprinklers sold by 10%, and the average sales price would increase $0.20 per unit. Waterways currently sells 496,000 sprinkler units at an average selling price of $27.80. The manufacturing costs are $7,654,360 variable and $1,991,155 fixed. Selling and administrative costs are $2,687,240 variable and $796,450 fixed. If Waterways begins mass-producing its special-order sprinklers, how would this affect the company? (Round ratio to 0 decimal places, e.g. 5% and Net income to 0 decimal places, e.g. 2,520.)

Current

New

Effect

Contribution margin ratio

%

%

Decrease or Increase

by

%

Net income

$

$

Decrease or Increase

by

$