Question

A product is currently made in a process-focused shop, where fixed costs are $8,000 per year and variable cost is $40 per unit. The firm currently sells 200 units of the product at $200 per unit. A manager is considering a repetitive focus to lower costs (and lower prices, thus raising demand). The costs of this proposed shop are fixed costs = $24,000 per year and variable cost = $10 per unit. If a price of $80 will allow 400 units to be sold, what profit (or loss) can this proposed new process expect? Do you anticipate that the manager will want to change the process? Explain.

Answer 1

Answer:

It will not proceed with the changes as it decreases the operating profit by 20,000.

Explanation:

current scenario:

contribution per unit:

200 selling price - 40 variable cost = 160

Then 200 x 160 - 200 = 24,000 operating income

proposed change in the process:

contribution per unit

80  selling price - 10 cost per untit = 70 per unit

Then 400 x 70 - 24,000 = 4,000

It will not proceed with the changes as it decreases the operating profit by 20,000.