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 Hobart Company packages the speakers, the cost per unit will increase by $1.20 due to packaging costs. However, the selling price will increase by $3.00 per unit.

New selling price = $33.00
New variable cost per unit = $19.80 ($11.00 + $7.60 + $0.20 + $0.40 + $0.60)

Therefore, new contribution margin per unit = $13.20 ($33.00 - $19.80)

At the current sales volume of 20,000 units, the contribution margin will increase by:

20,000 units x $13.20 = $264,000

The increase in contribution margin is greater than the increase in packaging costs:

20,000 units x $1.20 = $24,000

Therefore, the profits will increase by:

$264,000 - $24,000 = $240,000 or $36,000 if calculated on a per unit basis:

Increase in profit per unit = $12.00 ($13.20 - $1.20)
Increase in profit for 20,000 units = $240,000 ($12.00 x 20,000)

Hobart Company Produces Speakers for PA Systems