Question

The Night & Day Guitar company is a manufacturer of custom guitars. The selling price for one of their guitars is $1061 with direct materials and direct labor costing $210 and $332 per guitar respectively. The fixed manufacturing costs for the Night & Day Guitar company are $9600 and the variable overhead is $46 per unit. The fixed and variable selling expenses are $1820 and $99 per guitar respectively. The variable shipping costs per guitar are $147. Remaining fixed period costs are $1495. During the period, Night and Day sold 113 guitars.

Night and day is very proud of their product and they think they can get a higher price and sell more guitars if they hire a larger full time sales force and spend more on advertising. It is anticipated that expanding the sales force will increase fixed selling expenses by $4021 and spending $9798 during the period on advertising will allow the company to increase their selling price by $86 and sell 40 more guitars during the period.

What is the impact of the decision on the net income of Night and day. An increase in net income should be entered as a positive number, a decrease in net income should be entered as a negative number. Round your answer to the whole dollar.

Answer 1

Impact On net Income

	Effect	Additional Revenue or Expense
Effect On Current quanity of sale	Sales Price increased $86	(86*113units) =9,718
Additional Sales	units increased 40units.	(40units*227(W1))=9080
Additional Expenses:
Fixed selling expense	4021
Increased Advertisment Expense	9798
Total Increased expense		(-13,819)
	Increase in Net Income	4,979

W1) For Incresed no: of units effect on net income will be:

Sale price - Sum Variable cost =(1061-210-332-46-99-147) =227

why not fixed cost? Because fixed cost will not alter on number of production. only per unit fixed cost changes but no Effect on Total Net Income