Miller Company produces speakers for home stereo units.The speakers are sold to retail stores for $30.Manufacturing and other costs are as follows: The variable distribution costs are for transportation to the retail stores.The current production and sales volume is 20,000 per year.Capacity is 25,000 units per year.
A Tennessee manufacturing firm has offered a one-year contract to supply speakers at a cost of $17.00 per unit.If Miller Company accepts the offer,it will be able to rent unused space to an outside firm for $18,000 per year.All other information remains the same as the original data.What is the effect on profits if Miller Company buys from the Tennessee firm?

Question

Miller Company produces speakers for home stereo units.The speakers are sold to retail stores for $30.Manufacturing and other costs are as follows:  The variable distribution costs are for transportation to the retail stores.The current production and sales volume is 20,000 per year.Capacity is 25,000 units per year.
A Tennessee manufacturing firm has offered a one-year contract to supply speakers at a cost of $17.00 per unit.If Miller Company accepts the offer,it will be able to rent unused space to an outside firm for $18,000 per year.All other information remains the same as the original data.What is the effect on profits if Miller Company buys from the Tennessee firm?

Quizplus · Accepted Answer

To determine the effect on profits, we need to compare the current situation with the proposed arrangement.

Current situation:
Revenue per unit = $30
Variable cost per unit = $12 + $1 = $13
Contribution margin per unit = $30 - $13 = $17
Total contribution margin = 20,000 * $17 = $340,000
Fixed costs = $60,000 + $120,000 = $180,000
Profit = Total contribution margin - Fixed costs
Profit = $340,000 - $180,000 = $160,000

Proposed arrangement:
Cost per unit = $17
Contribution margin per unit = $30 - $17 = $13
Total contribution margin = 20,000 * $13 = $260,000
Fixed costs = $60,000 + $120,000 + $18,000 = $198,000
Profit = Total contribution margin - Fixed costs
Profit = $260,000 - $198,000 = $62,000

The difference in profit between the two situations is:

$160,000 - $62,000 = $98,000

Therefore, if Miller Company buys from the Tennessee firm, the effect on profits will be an increase of $8,000 ($98,000 divided by 12 months = $8,166.67).

Miller Company Produces Speakers for Home Stereo Units