Business

915 Words Jan 15th, 2013 4 Pages
DRUGS-R-US, INC.
Drugs-R-Us, Inc., produces equipment for manufacturing drugs. The costs of manufacturing and marketing this equipment at the company's normal volume of 3,000 units per month are shown in Exhibit 1. EXHIBIT 1 - Costs per Unit for Equipment
Unit manufacturing costs: Variable materials $200 Variable labor 300 Variable overhead 150 Fixed overhead 240 Total unit manufacturing costs $ 890

Unit marketing costs: Variable $100 Fixed 280 Total unit marketing costs $ 380
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Total unit costs $1,270

QUESTIONS
The following questions refer only to the data given above. Unless otherwise stated,
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In sales dollars?
The break-even volume in units
=Fixed Costs ÷ Contribution Margin per Unit =$1,560,000÷$830=1,880 units (rounded)
Contribution Margin Ratio
= Contribution Margin per Unit÷Units Selling Price=$830÷$1,580≈52.5%
The break-even volume in sales dollars
= Fixed Costs ÷ Contribution Margin Ratio =$1,560,000÷52.5%≈$2,971,428.57
3. Market research estimates that monthly equipment production could be increased to 3,500 units which is well within production capacity limitations, if the price were cut from $1,580 to $1,400 per unit. Assuming the cost behavior patterns implied by the data in Exhibit 1 are correct, would you recommend that this action be taken? What would be the impact on monthly sales, costs, and income?

After that monthly equipment production could be increased to 3,500 units and the price of equipment were cut from $1,580 to $1,400 per unit, the net income will reduce from $930,000 to $455,000 even monthly sales increasing to $4,900,000. But, the variable costs and fixed costs also dramatically increase to $2,625,000 and $1,820,000. Therefore, I wouldn’t suggest that this action be taken. As follow:

Drugs-R-Us, Inc.
CVP Income Statement

| Per Unit | Total | Sales (3,500 units) | | $ 1,400 | $ 4,900,000 | Variable costs | | | | Direct materials | $ 200 | | | Direct labor | 300 | | | Manufacturing overhead | 150 | | |