Question

The manager of Bojangles Guitars, a low cost keyboard manufacturer, is considering 2 options for manufacturing guitars. One is a completely manual system where the fixed costs of operating the workshop for a month total $2,500. Each guitar requires materials which cost $5 and takes one employee two hours to make. Employees are paid $15 an hour.

The other option is to rent a machine to assist in the production of the guitars. Doing so would increase the total fixed costs of operating the workshop for a month to $5,000. Using the machine would also reduce the employee labour time to one hour per guitar. Employees would still be paid $15 an hour. The material costs would remain the same.

The guitars are sold to a wholesaler for $45 each. Expected sales are 600 guitars per month. Using cost volume profit analysis to inform your decision which option would provide the highest monthly profit? (Provide your workings)

Answer 1

Option1 (Completely manual system )

Particulars	Amount
Sale (600*45)	$27,000
Less: Direct Material (600*5)	($3,000)
Less: Direct Labour (600*15* 2 hours)	($18,000)
Fixed Cost	($2,500)
Profit	$3,500

Option2 (Rent a machine)

Particulars	Amount
Sale (600*45)	$27,000
Less: Direct Material (600*5)	($3,000)
Less: Direct Labour (600*15* 1 hours)	($9,000)
Fixed Cost	($5,000)
Profit	$10,000

Option 2 (i.e. rent a machine to assist in the production of the guitars) is more profitable.