Sales total 50,000 units a year. The statues are finished either rough or polished, with an average demand of 60% rough and 40% polished. Iron ingots, the direct material, costs $5 per pound. Processing costs are $300 to convert 30 pounds into 60 statues. Rough statues are sold for $17 each, and polished statues can be sold for $19 or engraved for an additional cost of $5. Polished statues can then be sold for $23.50. How much would the profits/unit increase by if the Company should engrave the statues?

Question

Izayah Terrell

Business

5 July, 13:55

Sales total 50,000 units a year. The statues are finished either rough or polished, with an average demand of 60% rough and 40% polished. Iron ingots, the direct material, costs $5 per pound. Processing costs are $300 to convert 30 pounds into 60 statues. Rough statues are sold for $17 each, and polished statues can be sold for $19 or engraved for an additional cost of $5. Polished statues can then be sold for $23.50. How much would the profits/unit increase by if the Company should engrave the statues?

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Answers (1)

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Honey Pie · Answer 1

It is more profitable to not engrave the statues.

Explanation:

Giving the following information:

Sales = 50,000 units

Polished = 40% of sales

Direct material = $5 per pound

Processing = $300 to convert 30 pounds in 60 statues

Polish = $19 per unit

Engraved = $5 per unit

New selling price = $23,5

We need to determine whether it is more convenient to sell the units engraved or not.

First, we need to calculate the unitary cost of a polished unit.

The total cost of 60 units = 5*30 + 300 = $450

Unitary cost (normal) = 450/60 = $7.5

Unitary cost (engraved) = 7.5+5 = $12.5

Total sales = 50,000*0.4 = 20,000 units

Now, we can determine the total contribution margin of both options:

Sell as-is:

Total contribution margin = 20,000 * (19-7.5) = $230,000

Engrave:

Total contribtuion margin = 20,000 * (23.5 - 12.5) = $220,000

It is more profitable to not engrave the statues.