case
Should the Air Comfort Division institute the 5% price reduction on its air-conditioner units even if it cannot acquire the compressors internally for $50 each? Support your conclusion with appropriate calculations.
# of units= $6,000,000/$400=15,000 units+2,400 units=17,400 units
Before 5% Reduction After 5% Reduction Per Unit Total Per Unit Total
Sales Revenue $ 400 $ 6,000 $ 380* $ 6,612*
Variable Costs:
COGS: Compressor 70 1,050 70 1,218 Other Direct Material 37 555 37 643.80 Direct Labor 30 450 30 522 Variable Overhead 45 675 45 783 Total COGS 182 2,730 182 3,166.80
Variable Selling 18 270 18 3,13.20
Total Variable Costs 164 3,000 200 3,480
Contribution Margin $ 236 $ 3,000 $ 180 $ 3,132
*in thousands of dollars
*$400 x 95%= $380
*$380 x 17,500 u= $6,612
Air Comfort Division should institute the 5% price reduction on its air-conditioner units since the effect of this reduction would increase an additional of $132,000 ($3,132,000-$3,000,000) to its Income before tax. The additional profit is caused by a sale increase of $432,000 ($180 x 2,400) in the contribution margin and a loss in contribution margin on original volume arising from decrease in selling price of $300,000 ($20 x 15,000).
Independently of your answer to requirement (1), assume the Air Comfort Division needs 17,400 units. Should the Compressor Division be willing to supply the compressor units for $50 each? Support your conclusions with appropriate calculations.
External Internal
Sales Revenue $ 100 $ 50
Variable Costs:
COGS: Other Direct Material 12 10.50 Direct Labor 8 8 Variable Overhead 10 10 Total COGS 30 28.50
Variable Selling 6 0
Total Variable Costs 36 28.50
Contribution Margin $ 64 $ 21.50
Total Capacity 75,000
Less: Air Comfort Division 17,400
Remaining units to sell 57,600
Less: Projected sales volume 64,000
Loss on sales
# of units= $6,000,000/$400=15,000 units+2,400 units=17,400 units
Before 5% Reduction After 5% Reduction Per Unit Total Per Unit Total
Sales Revenue $ 400 $ 6,000 $ 380* $ 6,612*
Variable Costs:
COGS: Compressor 70 1,050 70 1,218 Other Direct Material 37 555 37 643.80 Direct Labor 30 450 30 522 Variable Overhead 45 675 45 783 Total COGS 182 2,730 182 3,166.80
Variable Selling 18 270 18 3,13.20
Total Variable Costs 164 3,000 200 3,480
Contribution Margin $ 236 $ 3,000 $ 180 $ 3,132
*in thousands of dollars
*$400 x 95%= $380
*$380 x 17,500 u= $6,612
Air Comfort Division should institute the 5% price reduction on its air-conditioner units since the effect of this reduction would increase an additional of $132,000 ($3,132,000-$3,000,000) to its Income before tax. The additional profit is caused by a sale increase of $432,000 ($180 x 2,400) in the contribution margin and a loss in contribution margin on original volume arising from decrease in selling price of $300,000 ($20 x 15,000).
Independently of your answer to requirement (1), assume the Air Comfort Division needs 17,400 units. Should the Compressor Division be willing to supply the compressor units for $50 each? Support your conclusions with appropriate calculations.
External Internal
Sales Revenue $ 100 $ 50
Variable Costs:
COGS: Other Direct Material 12 10.50 Direct Labor 8 8 Variable Overhead 10 10 Total COGS 30 28.50
Variable Selling 6 0
Total Variable Costs 36 28.50
Contribution Margin $ 64 $ 21.50
Total Capacity 75,000
Less: Air Comfort Division 17,400
Remaining units to sell 57,600
Less: Projected sales volume 64,000
Loss on sales