Waterways is thinking of mass-producing one of its special-order sprinklers. To do so would increase variable costs for all sprinklers by an average of $0.70 per unit. The company also estimates that this change could increase the overall number of sprinklers sold by 10%, and the average sales price would increase $0.20 per unit. Waterways currently sells 481,000 sprinkler units at an average selling price of $25.20. The manufacturing costs are $5,811,160 variable and $2,155,660 fixed. Selling and administrative costs are $2,673,680 variable and $798,370 fixed. If Waterways begins mass-producing its special-order sprinklers, how would this affect the company

Waterways Corporation

If Waterways begins mass-producing its special-order sprinklers, its net operating income would almost double, increasing by $680,202.

Explanation:

a) Data and Calculations:

Increase in variable costs per unit = $0.70

Increase in number of sprinklers sold = 10%

Increase in average sales price = $0.20

Current sales = 481,000 sprinkler units

Selling price = $25.20

New selling price = $25.40 ($25.20 + $0.20)

New quantity of sprinkler units = 529,100 (481,000 * 1.1)

Increase in variable cost = $370,370 (529,100 * $0.70)

New variable cost = $6,181,530 ($5,811,160 + $370,370)

Income Statements                          Normal    Mass Production

Sales revenue                              $12,121,200   $13,439,140

Variable manufacturing costs       $5,811,160     $6,181,530

Variable selling and admin. costs 2,673,680      2,941,048

Total variable costs                     $8,484,840    $9,122,578

Contribution margin                   $3,636,360    $4,316,562

Fixed costs:

Manufacturing costs                  $2,155,660    $2,155,660

Selling and administrative costs     798,370         798,370

Total fixed costs                        $2,954,030   $2,954,030

Net operating income                  $682,330    $1,362,532

Increase in net operating income = $680,202 ($1,362,532 - $682,330)

answer; /// the above statement is (true);

answer; ///(d); determining who competes most closely   with whom evaluating whether industry driving forces and competitive pressure favor some strategic groups and hurt others, and ascertaining whether the profit potential of different strategic groups varies due to the strengths and weaknesses in each groups respective market positions;