Question

: Oakwood Industries produces two product lines for the year 2018: T-shirts and Sweatshirts. Product profitability is analyzed as follows: T-SHIRTS SWEATSHIRTS Production and sales volume 78,000 units 21,500 units Selling price $16.00 $29.00 Direct material $2.00 $ 5.00 Direct labor $ 4.50 $8.20 Manufacturing overhead $ 3.00 $ 4.00 Gross profit $7.50 $12.80 Selling and administrative $ 4.00 $ 7.00 Operating profit $3.50 $5.80 What is the projected decline in operating income if the direct materials costs of T-Shirts increase to $3.50 per unit and direct labor costs of Sweatshirts increase to $14.00 per unit? Give your answer in total dollars for the entire year.

Answer 1

Projected decline in operating income = $241700

Explanation;

First of all let’s calculate existing operating income;

Operating income for T-shirts (78000 * $3.50) = $273000

Operating income for Sweatshirts (21500 * $5.80) = $124700

Hence, total operating income ($273000 + $124700) = $397700

Now, let’s calculate new operating income;

Operating income for T-shirts (78000 * $2) = $156000

Operating income for Sweatshirts (21500 * $0) = $0

Hence, total operating income ($156000 + $0) = $156000

Projected decline in operating income ($397700 – $156000) = $241700