As the newly appointed Controller of Lynbrook, Inc. you have been asked to evaluate several scenarios that management is considering to improve the overall profitability of the company. Lynbrook manufactures and sells a product called a Wren, its only product. The company normally produces and sells 60,000 Wrens each year at a selling price of $32 per unit. The company's unit costs at this level of activity are included below: Direct materials $10.00 Direct labor 4.50 Variable manufacturing 2.30 overhead Fixed manufacturing overhead 5.00 ($300,000 total) Variable selling expenses 1.20 Fixed selling expenses 3.50 ($210,000 total) Total cost per unit $26.50 The CFO of Lynbrook would like your response to the following three (3) independent situations to present to the management team early next week. Situation #1 Assume that Lynbrook has sufficient capacity to produce 90,000 Wrens each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by $80,000. Required: What is the financial advantage (disadvantage) of investing an additional $80,000 in fixed selling expenses? Would the additional investment be justified?
As the newly appointed Controller of Lynbrook, Inc. you have been asked to evaluate several scenarios that management is considering to improve the overall profitability of the company. Lynbrook manufactures and sells a product called a Wren, its only product. The company normally produces and sells 60,000 Wrens each year at a selling price of $32 per unit. The company's unit costs at this level of activity are included below: Direct materials $10.00 Direct labor 4.50 Variable manufacturing 2.30 overhead Fixed manufacturing overhead 5.00 ($300,000 total) Variable selling expenses 1.20 Fixed selling expenses 3.50 ($210,000 total) Total cost per unit $26.50 The CFO of Lynbrook would like your response to the following three (3) independent situations to present to the management team early next week. Situation #1 Assume that Lynbrook has sufficient capacity to produce 90,000 Wrens each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by $80,000. Required: What is the financial advantage (disadvantage) of investing an additional $80,000 in fixed selling expenses? Would the additional investment be justified?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:As the newly appointed Controller of Lynbrook, Inc. you have been asked to evaluate
several scenarios that management is considering to improve the overall profitability of
the company. Lynbrook manufactures and sells a product called a Wren, its only
product. The company normally produces and sells 60,000 Wrens each year at a selling
price of $32 per unit. The company's unit costs at this level of activity are included
below:
Direct materials
$10.00
Direct labor
4.50
Variable manufacturing
2.30
overhead
Fixed manufacturing overhead
5.00
($300,000 total)
Variable selling expenses
1.20
Fixed selling expenses
3.50
($210,000 total)
Total cost per unit
$26.50
The CFO of Lynbrook would like your response to the following three (3) independent
situations to present to the management team early next week.
Situation #1
Assume that Lynbrook has sufficient capacity to produce 90,000 Wrens each year
without any increase in fixed manufacturing overhead costs. The company could
increase its unit sales by 25% above the present 60,000 units each year if it were willing
to increase the fixed selling expenses by $80,000.
Required:
What is the financial advantage (disadvantage) of investing an additional $80,000 in
fixed selling expenses? Would the additional investment be justified?
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