Posted: August 9th, 2016

Which firm will have more stable profits when sales change?

Problem #1
Assume that Sony and Microsoft both plan to introduce a new hand-held video game. Sony plans to use a heavily automated production process to produce its product while Microsoft plans to use a labor-intensive production process. The following revenue and cost relationships are provided:

Required:
a) Compute the contribution margin per unit for each company.
b) Prepare a contribution income statement for each company assuming each company sells 8,000 units.
c) Compute each firm’s net income if the number of units sold increases by 10%
d) Which firm will have more stable profits when sales change? Why?

Problem #2
Morris Company makes one product, and it expects to incur a total of $400,000 in indirect (overhead) costs during 2007. Production of the product for the year is expected to be:

Required:
a) Calculate a predetermined overhead rate based on the number of units of product expected to be made during 2007.
b) Assuming that direct materials and direct labor costs are $8 and $6, respectively, determine the total cost per unit using the overhead rate you calculated in part a).