Question

Burns Industries currently manufactures and sells 20.000 power saws per month, although it has the capacity to produce 35,000 units per month. At the 20,000-unit-per-month level of production, the per- unit cost is $65, consisting of S40 in variable costs and S25 in fixed costs. Burns sells its saws to retail stores for 580 each. Allen Distributors has offered to purchase 5,000 saws per month at a reduced price. Burns can manufacture these additional units with no change in its present level of fixed manufacturing costs Assume that Allen Distributors offers to purchase the additional 5,000 saws at a price of S47 per unit.

If Burns accepts this price, Burns' monthly gross profit on sales of power saws will:

A. Decrease by $40,000.
B. Decrease by $240,000.
C. Increase by $185,000.
D. Increase by $35.000

Answer 1

Answer:

D. Increase by $35.000

Explanation:

The computation of the gross profit in case of price is accepted is shown below:

Sales     (5,000 × $47) $235,000

Less: Variable costs(5,000 × $40) $200,000

Gross profit $35,000

We simply deduct the variable cost from the sales revenue so that the gross profit could come and the same is applied above

Hence, the last option is correct