The Vice President for Sales and Marketing at Waterways
Corporation is planning for production needs to meet sales demand
in the coming year. He is also trying to determine how the
company’s profits might be increased in the coming year. This
problem asks you to use cost-volume-profit concepts to help
Waterways understand contribution margins of some of its products
and decide whether to mass-produce any of them.
Waterways markets a simple water control and timer that it mass-produces. Last year, the company sold 741,000 units at an average selling price of $4.90 per unit. The variable costs were $2,541,630, and the fixed costs were $762,489.
1) If sales increase by 57,000 units and the cost behaviors do
not change, how much will income increase on this
Increase in income = $83,790
Number of units sold = 741,000
Total Fixed costs = $762,489
Total Variable cost = $2,541,630
Variable cost per unit = Total variable cost ÷ Number of units sold
= $2,541,630 ÷ 740,000
= $3.43 Per unit
Contribution margin per unit = Selling price - variable cost per unit
= $4.90 - $3.43
Since the cost behaviors do not change, the total fixed costs will be the same, therefore the increase in profit can be calculated by multiplying Contribution Margin Per unit by Additional Units
= $1.47 × 57,000
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