Impact of increase in production volume on sales, cost and income.
Redi-Watt Generators, Inc. produced emergency backup generators for use in large commercial buildings. The costs of manufacturing and marketing the generators at the company's normal volume of 3,000 units per month are shown.
Costs per Unit for Generators
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Unit Manufacturing costs:
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Variable Materials
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$1,000
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|
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Variable Labor
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1,500
|
|
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Variable Overhead
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500
|
|
|
Fixed Overhead
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1,200
|
|
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Total Manufacturing Cost
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$4,200
|
|
Unit Marketing Costs:
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Variable
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500
|
|
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Fixed
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1,400
|
|
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Total Marketing Cost
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1,900
|
|
Total Unit Cost:
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$6,100
|
The following questions refer only to the data given above. Unless otherwise stated, assume there is no connection between situations described in each of the questions, each is to be treated independently. Unless otherwise stated, a regular selling price of $7,400 per unit should be assumed.
Market research estimates that volume could be increased to 3,500 units per month, which is well within production capacity limitations, if the price were cut from $7,400 to $6,500 per unit. Assuming the cost behavior patterns implied by the data in Exhibit 1 are correct, would you recommend this action be taken? What would be the impact on monthly sales, costs, and income?