Last month, Brand Products manufactured 25,000 calculators and sold 23,000 of these calculators at a price of $10.00 each.Manufacturing costs consisted of direct labor, $30,000; direct materials, $32,000; variable manufacturing overhead, $3,500; fixed manufacturing overhead, $21,500.Selling and administrative costs are all fixed and totaled $24,000.Beginning inventory consists of no units.Brand Products uses full costing.How much will the company's gross margin increase if sales increase 10%?
A)Less than 10%
B)More than 10%
C)10%
D)It depends on other factors not given.

Question

Quizplus · Accepted Answer

First, let's calculate the cost per unit of the calculators.
Total manufacturing costs:
Direct labor = $30,000 
Direct materials = $32,000 
Variable manufacturing overhead = $3,500 
Fixed manufacturing overhead = $21,500 
Total manufacturing costs = $87,000

Cost per unit: 
$87,000 ÷ 25,000 units = $3.48/unit

Next, let's calculate the cost of goods sold (COGS) for the 23,000 units sold:
23,000 units sold x $3.48/unit = $80,040 COGS

Revenue from 23,000 units sold: 
23,000 units sold x $10.00/unit = $230,000 revenue

Gross margin: 
$230,000 revenue - $80,040 COGS = $149,960 gross margin

If sales increase by 10%, the company would sell an additional: 
23,000 units sold x 10% = 2,300 additional units

Revenue from additional 2,300 units sold: 
2,300 units sold x $10.00/unit = $23,000 revenue

COGS for additional 2,300 units sold: 
2,300 units sold x $3.48/unit = $7,992 COGS

Total revenue: 
$230,000 + $23,000 = $253,000

Total COGS: 
$80,040 + $7,992 = $88,032

Gross margin with 10% increase in sales: 
$253,000 revenue - $88,032 COGS = $164,968 gross margin

$164,968 gross margin - $149,960 gross margin = $15,008 increase in gross margin

Therefore, the company's gross margin will increase by more than 10% if sales increase by 10%. Answer: B.

Last Month, Brand Products Manufactured 25,000 Calculators and Sold 23,000