Question

Carole’s Briefcases has two alternatives for manufacturing their briefcases. The first alternative is to rent a machine make the briefcases. With this alternative the total fixed costs of operating the workshop for a month would be $12,000. The material costs for each briefcase would be $24 and there would be employee labour of half an hour. Employees are paid $20 an hour. The other alternative is to use a manual production process. In this case the fixed costs of operating the workshop for a month would be $8,000. Each briefcase still requires materials which cost $24 but it would take 1 hours of labour to make each briefcase.

The briefcases are sold for $60 each and Carole expects to sell 700 per month.

Using cost volume profit analysis to inform your decision which option would provide the highest monthly profit? (Provide your workings)

Answer 1

Cost volume profit chart
	Alternative 1	Alternative 2
	Total	Per unit	Total	Per unit
Sales	$42,000	$60	$42,000	$60
Less:Variable costs:
Direct Materials(700 units*$24)	$16,800	$24	$16,800	$24
Direct Labour(0.50 hours*$20*700) & (1 hours*$20*700)	$7,000	$10	$14,000	$20
Total Variable Costs	$23,800	$34	$30,800	$44
Contribution margin	$18,200	$60	$11,200	$60
Less:Fixed costs	$12,000		$8,000
Net Income	$6,200		$3,200
So Alternative 1 has higher monthly profit