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.
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

Quizplus · Accepted Answer

If the company packages the speakers, the cost per unit will increase by £1.20, making the total cost per unit £23.20. The selling price will increase by £3.00, making the total sales price £33.00. 
The contribution margin per unit will be: £33.00 - £23.20 = £9.80 
The total contribution margin will be: £9.80 x 20,000 units = £196,000 
The fixed costs remain the same, so the increase in contribution margin will lead to an increase in profits. 
Therefore, the packaging of speakers will increase profits by: 
£196,000 - £160,000 = £36,000.

Miller Company Produces Speakers for Home Stereo Units