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Q1) Redi-Watt Generators, Inc. manufactured emergency backup generators for use in large commercial buildings. Costs of manufacturing and marketing generators at company's normal volume of 3,000 units per month are shown.

Costs per Unit for Generators

Unit Manufacturing costs:
Variable Materials $1,000  
Variable Labor 1,500  
Variable Overhead 500  
Fixed Overhead 1,200  
Total Manufacturing Cost   $4,200
Unit Marketing Costs:
Variable 500  
Fixed 1,400  
Total Marketing Cost   1,900
Total Unit Cost:   $6,100

Following problems refer only to data given above. Unless otherwise stated, suppose there is no connection between situations described in each of problems, each is to be treated independently. Unless otherwise stated, a regular selling price of $7,400 per unit must be supposed.

Market research evaluates which volume could be increased to 3,500 units per month, that is well within production capacity limitations, if price were cut from $7,400 to $6,500 per unit. Suppose cost behavior patterns implied by data in Exhibit 1 are correct, would you suggest this action be taken? What would be  impact on monthly sales, costs, and income?

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M918801

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