Multiple Changes in Profit Plans
In an attempt to improve profit performance, Anderson Company’s management is considering a number of alternative actions. An October contribution income statement for Anderson Company follows.
ANDERSON COMPANY
Contribution Income Statement
For Month of October
Sales ( 24,000 units x $75) $1,800,000
Less variable costs
Direct materials ( 24,000 units x $10) $240,000
Direct labor ( 24,000 units x $10) 240,000
Variable factory overhead ( 24,000 units x $4) 96,000
Selling and administrative ( 24,000 units x $2) 48,000 (624,000)
Contribution margin ( 24,000 units x $49) 1,176,000
Less fixed costs
Factory overhead 720,000
Selling and administrative 480,000 (1,200,000)
Net income (loss) $(24,000)
Required
Determine the effect of each of the following independent situations on monthly profit.
Reducing the selling price by $5 per unit. This should increase the monthly sales by 6,000 units. At this higher volume, additional equipment and salaried personnel would be required. This will increase fixed factory overhead by $8,000 per month and fixed selling and administrative costs by $3,600 per month. Increasing the unit selling price by $5 per unit. This action should result in a 4,000 unit decrease in monthly sales. Combining alternatives (a) and (d).
