SUN manufactures high-end sunglasses that it sells in retail shops and online for $310 per unit. Assume the following manufacturing and other costs.
Variable Costs per Unit Fixed Costs per Month
Direct Materials $80.00 Selling and Administrative $375,000.00
Direct Labour $50.00 Factory overhead $450,000.00
Factory Overhead $35.00 Total $825,000.00
Distribution $10.00
Total $175.00
The variable distribution costs are for transportation to retail partners. Assume the current monthly production and sales volume is 15,000 units. Monthly capacity is 20,000 units.
Required: Determine the effect of each of the following independent situations on monthly profit.
a) A $50 increase in the unit selling price should result in a 2,000 unit decrease in monthly sales.
b) A 10% decrease in unit selling price should result in a 6,000 unit increase in monthly sales. However, because of capacity constraints, the last 1,000 units would be produced during overtime with the direct labour cost increasing by 50%.
c) A British distributor has proposed to place a special, one-time order for 1,000 units at a reduced price of $250 per unit. The distributor would pay all distribution costs. There would be additional fixed selling and administrative costs of $750.
d) A Swiss distributor has proposed to place a special, one-time order for 6,000 units at a special price of $250 per unit. The distributor would pay all distribution costs. There would be additional fixed selling and administrive costs of $1,000. Assume overtime production is not possible.
e) Assume SUN provides a designer case for each pair of sunglasses that it manufactures. A supplier has offered a one-year contract to supply the cases at a cost of $10 per unit. If SUN accepts the offer, it will be able to reduce variable manufacturing costs by 5%, reduce fixed costs by $5,000, and rent out some freed-up space for $4,000 per month.
f) The sunglasses also come ith a choice of lens tint. Assume that eliminating tha option would reduce variable costs by $5 per unit and eliminiate $50,000 in fixed factory overhead. The selling price would likely have to decrease to $290 per unit.