ACC 333 Lecture Notes - Demand Curve, Plywood, Deadweight Loss
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Concepts: Variable cost Fixed cost Total cost Average total cost Marginal cost
Total revenue Average revenue Marginal revenue Demand Curve
1. Mark Sampson, President of Sampson Switch Company must consider the pricing and production for the Ultra Switch Model B, one of the companyâs top selling models. Switch production includes grinding and assembly of finished components. Marketing efforts consist primarily of print ads in trade publications. Last year the Model B produced a profit of $8,000.
Production facts. Sampson hires part time workers on an âas neededâ basis to do the grinding task. On average, a grinder is paid $8.00 per hour and s/he is expected to produce 200 switch plates per each 8-hour day. Switch assemblers, also part-time workers, are paid $50 per day and they are expected to assemble 5 switches per hour. Each switch consists of two switch plates and assorted other components (the cost of the âother componentsâ is $3.11 per switch).
Fixed Costs. Other costs include the year-long contract for the rental of the assembly line equipment ($1,000 per month).
Marketing facts. According to next yearâs plan, Mark expects to place 10 black and white print ads (each $500) and two special feature, color ads (each $2,500) for the Model B. Salaries for the marketing sales force that are allocated to the Model B will total $18,000 next year.
1a. What is the cost to produce one switch? (i.e., the unit variable cost)?
1b. What and how much are the items composing the total âfixedâ costs for next year?
1c. Graph the relationship between quantity produced (on the X-axis) and Total Cost (on the Y-axis).
1d. How much is the per-unit contribution if the product is priced at $15 a unit?
1e. What was the profit last year? What will be the change in profitability for the Model B if the product is priced at $15 per unit and 2,500 units are sold?
1f. What is the breakeven point if the product is priced at $15? How many must be sold next year in order to produce the same profit level as last year?
1g. Assume that Mark has $50,000 in equity invested in the Model B line. How many units must be sold in order to return 25% on his equity?
2. Answer qs 1a-g assuming that the selling price is reduced to $10 and demand increases by a factor of four.
3. After much investigation, the marketing research department tells Mark that they expect the âdemand curveâ to be. Compare the expected demand with the breakeven point for each price point. Knowing this information, what price should Mark charge in order to maximize profits on the Model B ?
selling price | units demanded | break even point |
$15 | 2,500 | ... |
$10 | 10,000 | ... |
$9 | 13,000 | .... |
$8 | 14,000 | ..... |
$7 | 15,000 | ..... |
4a. Create a graph showing âQuantity Demandedâ on the X-axis and âTotal Revenue $â on the Y-axis for each of the five priceâquantity demanded points listed in q 3 above.
4b. Create a graph that superimposes the Total Revenue for the five points of the âDemand Curveâ on the âBreakevenâ Chart of the Model B (note the $$ Y -axis will represent Total Revenue for the Demand curve and will represent Total Cost for the Breakeven chart). { 01.81 gif k&b785 g pees ]
Mathews Company manufactures only one product. For the year ended December 31, the The excess of sales over variable costs.contribution margin increased by $20,280 from the planned level of $681,720. The president of Mathews Company has expressed some concern about this increase and has requested a follow-up report.
The following data have been gathered from the accounting records for the year ended December 31:
Actual | Planned | DifferenceâIncrease (Decrease) | ||||
Sales | $1,339,000 | $1,318,980 | $20,020 | |||
Variable costs: | ||||||
Variable cost of goods sold | $507,000 | $533,520 | $(26,520) | |||
Variable selling and administrative expenses | 130,000 | 103,740 | 26,260 | |||
Total variable costs | $637,000 | $637,260 | $(260) | |||
Contribution margin | $702,000 | $681,720 | $20,280 | |||
Number of units sold | 13,000 | 14,820 | ||||
Per unit: | ||||||
Sales price | $103 | $89 | ||||
Variable cost of goods sold | 39 | 36 | ||||
Variable selling and administrative expenses | 10 | 7 |
Required:
1. Prepare a contribution margin analysis report for the year ended December 31.
Mathews Company | ||
Contribution Margin Analysis | ||
For the Year Ended December 31 | ||
Planned contribution margin | $ | |
Effect of change in sales: | ||
Sales quantity factor | $ | |
Unit price factor | ||
Total effect of change in sales | ||
Effect of changes in variable cost of goods sold: | ||
Variable cost quantity factor | $ | |
Unit cost factor | ||
Total effect of changes in variable cost of goods sold | ||
Effect of changes in variable selling and administrative expenses: | ||
Variable cost quantity factor | $ | |
Unit cost factor | ||
Total effect of changes in variable selling and administrative expenses | ||
Actual contribution margin | $ |
2. At a meeting of the board of directors on January 30, the president, after reviewing the contribution margin analysis report, made the following comment:
It looks as if the price increase of $14 was a favorable tradeoff for decreased sales volume, yet variable cost of goods sold was less than planned and variable selling and administrative expenses were out of control and needed to be investigated. He went on to say that since the favorable tradeoff between higher price and lower sales volume was so successful, the company should consider increasing the sales price to $130.
Do you agree or disagree with the president's proposal and which reason would best explain your decision about the data?
a) Disagree with the president because the majority of the decrease in the variable cost of goods sold was due to the variable cost quantity factor and the increased variable selling and administrative expenses are probably a result additional selling efforts needed to be competitive at higher prices.
b) Agree with the president because the unit cost factor for the variable selling and administrative cost is greater than the unit cost factor for the variable cost of goods sold, making an investigation necessary.
c) Agree with the president because the total effect of change in sales is greater than the total effect of changes in variable cost of goods sold, making an additional price raise attractive for more profits.
d) Disagree with the president because the contribution margin as a percentage of sales is greater for the planned sales level than the actual sales level, making his concern about variable selling and administrative expenses unwarranted.
e) Agree with the president because the majority of the decrease in the variable cost of goods sold was due to the sales price factor, as well as an increase in the variable selling and administrative expenses as a percentage of sales, making an additional price raise attractive for more profits.