Lakeside Inc. produces a product that currently sells for $57.60 per unit. Current production costs per unit include direct materials, $22; direct labor, $24; variable overhead, $11.00; and fixed overhead, $11.00. Product engineering has determined that certain production changes could refine the product quality and functionality. These new production changes would increase material and labor costs by 20% per unit. If Lakeside could sell the refined version of its product for $40 per unit, should it be processed further?

Question

Business

Goldie

5 November, 08:00

Lakeside Inc. produces a product that currently sells for $57.60 per unit. Current production costs per unit include direct materials, $22; direct labor, $24; variable overhead, $11.00; and fixed overhead, $11.00. Product engineering has determined that certain production changes could refine the product quality and functionality. These new production changes would increase material and labor costs by 20% per unit. If Lakeside could sell the refined version of its product for $40 per unit, should it be processed further?

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Answers (1)

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Kamren Watts · Answer 1

It is convenient to make the changes.

Explanation:

Giving the following information:

Selling price = $57.60 per unit.

Direct materials = $22

Direct labor = $24

Variable overhead = $11.00

Fixed overhead = $11.00.

New costs:

Direct material cost = 22*1.2 = $26.4

Direct labor cost = 24*1.2 = $28.8

I suppose that the selling price will increase by $40.

To determine whether the changes increase profit or not, we need to calculate the unitary contribution margin per unit for both options:

Contribution margin = selling price - unitary variable cost

Actual Contribution margin:

Contribution margin = 57.6 - (22 - 24 - 11) = 0.6

New contribution margin:

Contribution margin = 97.60 - (26.4 - 28.8 - 11) = $31.4