Hobart Company produces speakers for PA systems. The speakers are sold to retail music stores for $30. Manufacturing and other costs are as follows: The variable distribution costs are for transportation to the retail music 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 Hobart Company packages the speakers?
A) no change
B) decrease of $24,000
C) decrease of $36,000
D) increase of $36,000

Question

Hobart Company produces speakers for PA systems. The speakers are sold to retail music stores for $30. Manufacturing and other costs are as follows:  The variable distribution costs are for transportation to the retail music 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 Hobart Company packages the speakers?
A) no change 
B) decrease of $24,000 
C) decrease of $36,000 
D) increase of $36,000

Quizplus · Accepted Answer

If the speakers are packaged, the cost per unit will increase by $1.20 due to the additional packaging cost. However, the selling price will increase by $3.00 per unit.

Therefore, the new profit per unit will be:

Profit per Unit = Selling Price per Unit - Total Cost per Unit
Profit per Unit = $33.00 - ($11.20 + $4.80 + $4.00 + $1.20)
Profit per Unit = $33.00 - $21.20
Profit per Unit = $11.80

Thus, the total profit for 20,000 units with packaging will be:

Total Profit = Profit per Unit x Number of Units
Total Profit = $11.80 x 20,000
Total Profit = $236,000

The total profit without packaging was:

Total Profit = Profit per Unit x Number of Units
Total Profit = $10.00 x 20,000
Total Profit = $200,000

Therefore, the effect on profits if Hobart Company packages the speakers is an increase of $36,000 ($236,000 - $200,000).

Hobart Company Produces Speakers for PA Systems