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

Solution: Calculation of monthly profit under both options:

	Manual System	Machine System
Sales	600 guitars * $45 = $27,000	600 guitars * $45 = $27,000
Less: Variable Cost
Material	(600 guitars * $5) = ($3,000)	(600 guitars * $5) = ($3,000)
Employee Cost	(600 guitars * 2 hours * $15) = ($18,000)	(600 guitars * 1 hour * $15) = ($9,000)
Contribution	$6,000	$15,000
Less: Fixed Cost	($2,500)	($5,000)
Profit	$3,500	$10,000

Rent a machine to assist in the production of the guitars option would provide the highest monthly profit.

_{Please rate positive and comment in case of any doubt. I would be happy to help you further.}