The president of Company X is puzzled by the operating profit report and summary of manufacturing activity for the year, in which $1,200,000 raw materials cost was wasted and charged to expense in the year. He expected that operating profit would be $1,200,000 lower. Operating profit in the wasted raw materials scenario is only $100,000 lower than in table. Explain to the president why operating profit is only $100,000 lower.
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Company X
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Per Unit
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Totals
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Operating Profit Report for Year
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Sales volume, in Units
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110,000
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Sales Revenue
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$1,400.00
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$154,000,000
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Cost of Goods Sold Expense (see below)
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-760
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-83,600,000
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Gross Margin
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$640.00
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$70,400,000
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Variable Operating Expenses
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-300
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-33,000,000
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Contribution Margin
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$340.00
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$37,400,000
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Fixed Operating Expenses
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-21,450,000
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Operating Profit
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$15,950,000
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Manufacturing Activity Summary for Year
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Per Unit
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Totals
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Annual Production Capacity, in Units
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150,000
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Actual Output, in Units
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120,000
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Raw Materials
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$215.00
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$25,800,000
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Direct Labor
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125
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15,000,000
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Variable Manufacturing Overhead Costs
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70
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8,400,000
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Total Variable Manufacturing Costs
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$410.00
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$49,200,000
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Fixed Manufacturing Overhead Costs
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350
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42,000,000
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Product Cost and Total Manufacturing Costs
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$760.00
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$91,200,000
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