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?