Miller Company produces speakers for home stereo units.The speakers are sold to retail stores for $30.Manufacturing and other costs are as follows: $\begin{array}{lrlr}
\text { Variable costs per unit: } & & \text { Fixed costs per month: } \
\text { Direct materials } & \$ 9.00 & \text { Factory overhead } & \$ 120,000 \
\text { Direct labour } & 4.50 & \text { Selling and admin. } & \underline{60,000} \
\text { Factory overhead } & 3.00 & \text { Total } & \$ 180,000 \
\text { Distribution } & 1.50 & & \
\text { Total } & \$ 18.00 & &
\end{array}$
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.
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The speakers are currently unpackaged.Packaging them individually would increase costs by $1.20 per unit.However,the units could then be sold for $33.00.All other information remains the same as the original data.What is the effect on profits if Miller Company packages the speakers?

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: $\begin{array}{lrlr}
\text { Variable costs per unit: } & & \text { Fixed costs per month: } \
\text { Direct materials } & \$ 9.00 & \text { Factory overhead } & \$ 120,000 \
\text { Direct labour } & 4.50 & \text { Selling and admin. } & \underline{60,000} \
\text { Factory overhead } & 3.00 & \text { Total } & \$ 180,000 \
\text { Distribution } & 1.50 & & \
\text { Total } & \$ 18.00 & &
\end{array}$
 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.
-
The speakers are currently unpackaged.Packaging them individually would increase costs by $1.20 per unit.However,the units could then be sold for $33.00.All other information remains the same as the original data.What is the effect on profits if Miller Company packages the speakers?

Quizplus · Accepted Answer

If Miller Company packages the speakers, the total cost per unit will increase by $1.20, resulting in a new total cost of $14.40 per unit ($13.20 in variable costs + $1.20 in packaging costs).

The selling price per unit will increase to $33, resulting in a gross profit of $18.60 per unit ($33 selling price - $14.40 total cost).

The total gross profit for 20,000 speakers would be $372,000 ($18.60 gross profit per unit x 20,000 units).

Compared to the original scenario (where the speakers were sold for $30 each), the gross profit per unit increases by $3.60 ($18.60 - $15 in gross profit per unit under the original scenario).

Therefore, the total increase in gross profit for the 20,000 units would be $72,000 ($3.60 gross profit increase per unit x 20,000 units).

This means that the company's profits would increase by $36,000 ($72,000 gross profit increase - $36,000 increase in packaging costs).

Therefore, the best choice is C.

Miller Company Produces Speakers for Home Stereo Units The Variable Distribution Costs Are for Transportation to the Retail