Please help! Having a very diffiuclt time understanding Zimmerman Manufacturing
ID: 2434086 • Letter: P
Question
Please help! Having a very diffiuclt time understanding Zimmerman Manufacturing limited produces and sells oneproduct, a three foot Canadian flag. During 20X6 the companymanufactured and sold 50,000 flags at $26.00 each. Existingproduction capacity is 60,000 flags per year. In formulating the 20X7 budget, magament isfaced with several decisions concerning product pricing andoutput. The following information is available. 1) A market survey shows that the sales volume depends on thesales price. For each $1drop in selling price, sales volume wouldincrease by 10,000 flags. 2) The companys expected cost structure for 20X7 is asfollows a) Fixedcost (regardless of production or sales activities),$360,000 b)Variable cost(including production, selling, and administrative expenses)$15 3) To increase annual capacity form the present 60,000 to90,000 flags, additional investment for plant building andequipment and the like of $500,000 would be necessary. Theestimated average life of the investment would be 10 years, sothe fixed costs would increase by an average of $50,000 peryear. (expansion of less than 30,000 additional units of capiticywould cost sightly less than $50,000 Indicate with reasons what the level of production and theselling price should be for the coming year. Also indicate wheterthe company should approve the plant expansion. Show calculations.Ignore income tax considerations and the time value of money. Please help. I am so lost. Thank You Please help! Having a very diffiuclt time understanding Zimmerman Manufacturing limited produces and sells oneproduct, a three foot Canadian flag. During 20X6 the companymanufactured and sold 50,000 flags at $26.00 each. Existingproduction capacity is 60,000 flags per year. In formulating the 20X7 budget, magament isfaced with several decisions concerning product pricing andoutput. The following information is available. 1) A market survey shows that the sales volume depends on thesales price. For each $1drop in selling price, sales volume wouldincrease by 10,000 flags. 2) The companys expected cost structure for 20X7 is asfollows a) Fixedcost (regardless of production or sales activities),$360,000 b)Variable cost(including production, selling, and administrative expenses)$15 3) To increase annual capacity form the present 60,000 to90,000 flags, additional investment for plant building andequipment and the like of $500,000 would be necessary. Theestimated average life of the investment would be 10 years, sothe fixed costs would increase by an average of $50,000 peryear. (expansion of less than 30,000 additional units of capiticywould cost sightly less than $50,000 Indicate with reasons what the level of production and theselling price should be for the coming year. Also indicate wheterthe company should approve the plant expansion. Show calculations.Ignore income tax considerations and the time value of money. Please help. I am so lost. Thank YouExplanation / Answer
If the company want to increase the sales to 60,000 units, priceneed to drop by $1 and selling at $25/unit Contribution Margin = $25-$15 = $10 Break even in sakes unit =$360,000/10 = 36,000 units Profit = (60,000-36,000)*10 = $240,000 However, when company wan to invest in new plant to produce 900,000units, to sell it, the price need to drop by $3 Now selling at $22/unit Contribution Margin = $22-$15 = $7 Fixed Cost = $360,000+$50,000 = $410,000 Break even in sales = $410,000/$7 = 58,571 units Profit = (90,000-58,571) * $7 = $220,003 After improving the plant, the profit earn will decrease. It mightnot be a good consideration to build it based on profit earned.