Timmy N. runs a small shop that manufactures and sells battery testers and solenoid testers for quick, easy use around the home. The following information related to these two products has been gathered from Timmy’s accounting records for the most recent year:

Furthermore, the total unit cost of each product is calculated as follows:

Both fixed manufacturing and fixed marketing and administrative costs are assigned to products based on the number of units sold. That is, Timmy’s accountant takes the total fixed costs incurred and divides them by the total number of units sold to arrive at a fixed cost per unit. Moreover, Timmy expects to incur $420,000 in total fixed costs each year regardless of production volume. Because Timmy’s shop produced 30,000 total units in the most recent year, each product was assigned $420,000/30,000 5 $14 per unit in fixed costs.

Required:
a. What was Timmy’s overall profit for the most recent year? What was Timmy’s reported profit for each product?
b. What was Timmy’s total contribution margin for the most recent year? What was Timmy’s contribution margin on each product?
c. Since the unit cost of the solenoid tester exceeds the unit price, Timmy believes that his business would be more profitable if he stopped producing solenoid testers. Is this true? By how much will Timmy’s profit increase or decrease if he stops producing and selling solenoid testers?
d. Based on your answers to parts (a) through (c), what inferences do you draw about the value of expressing fixed costs as the amount allocated per unit rather than the total of theexpenditure?

Transcribed Image Text:

Battery Tester Solenoid Tester Sales in units 20,000 10,000 Unit selling price Total unit cost $35 $28 $20 $22 Battery Teser Solenoid Tester Fixed costs: Manufacturing $10 per un S10 per unit Marketing & administrative S4 per unt $4 per unit Variable costs Manufacturing Marketing & administrative S12 per unit $6 per unit $2 per unit $28 per uni 22 per unit $2 per unit Total