Question

The Night & Day Guitar company is a manufacturer of custom guitars. The selling price for one of their guitars is $964 with direct materials and direct labor costing $233 and $339 per guitar respectively. The fixed manufacturing costs for the Night & Day Guitar company are $8531 and the variable overhead is $48 per unit. The fixed and variable selling expenses are $1963 and $61 per guitar respectively. The variable shipping costs per guitar are $98. Remaining fixed period costs are $1385. During the period, Night and Day sold 114 guitars. Night and day is very proud of their product and they think they can get a higher price and sell more guitars if they hire a larger full time sales force and spend more on advertising. It is anticipated that expanding the sales force will increase fixed selling expenses by $4498 and spending $9051 during the period on advertising will allow the company to increase their selling price by $66 and sell 39 more guitars during the period. What is the impact of the decision on the net income of Night and day. An increase in net income should be entered as a positive number, a decrease in net income should be entered as a negative number. Round your answer to the whole dollar.

Answer 1

Current:

Sales	[114*964]	109896
Less: Costs
Direct Materials	[114*233]	26562
Direct Labor	[114*339]	38646
Fixed Manufacturing costs		8531
Variable manufacturing costs	[114*48]	5472
Fixed selling costs		1963
Variable selling costs	[114*61]	6954
Variable shipping costs	[114*98]	11172
Fixed period costs		1385
Total costs		100685
Net Income		9211

Proposed:

Sales	[153*(964+66)]	157590
Less: Costs
Direct Materials	[153*233]	35649
Direct Labor	[153*339]	51867
Fixed Manufacturing costs		8531
Variable manufacturing costs	[153*48]	7344
Fixed selling costs	[1963+4498]	6461
Variable selling costs	[153*61]	9333
Variable shipping costs	[153*98]	14994
Fixed period costs		1385
Advertising costs		9051
Total costs		144615
Net Income		12975

Increase in Net income

[12975 - 9211]

3764