Question

The Big Fly division of Diversified has a single product: the official major league baseball. Big Fly normally produces and sells 60,000 baseballs, each year at a selling price of $32 per unit. The company’s unit costs at this level of activity are given below:

Direct materials
Direct labor
Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses
Fixed selling expenses
Total cost per unit

$ 10.00 4.50 2.30 5.00 ($300,000 total) 1.20 3.50 ($210,000 total) $26.50

A number of questions relating to the production and sale of baseballs follow. Each requirement below is independent. Please remember to show all of your calculations and assumptions (you will receive no credit just for just an answer.)

Requirements (show all of your work or you won’t receive credit.)

AssumethatBigFlyhassufficientcapacitytoproduce90,000baseballseachyear without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by $80,000. What is the financial advantage (disadvantage) of investing an additional $80,000 in fixed selling expenses? Would the additional investment be justified? Interim Submission 4/10 due via email end of class.

Answer 1

What is the financial advantage (disadvantage) of investing an additional $80,000 in fixed selling expenses?

Total Sales (Normal + 25%) (75,000 x $32) $ 2,400,000

Less: Costs

DIrect Materials (75,000 x $10) $ 750,000

Direct Labor (75,000 x $4.50) $ 337,500

Variable manufacturing overhead (75,000 x $2.30) $ 172,500

Fixed manufacturing overhead $ 300,000

Variable selling expenses (75,000 x $1.20) $ 90,000

Fixed selling expenses ($210,000 + $80,000) $ 290,000

Net Income $ 460,000

Net Income (for sales of 60,000) = 60,000 x ($32 - $26.50) $ 330,000

There is a financial advantage of $ 130,000 ($460,000 - $330,000) by investing an additional $80,000 in fixed selling expenses. The additional investment is therefore justified as the net income is more and there are no increase in fixed manufacturing costs too.