Hobart Company Produces Speakers for PA Systems The Variable Distribution Costs Are for Transportation to the Retail

question 38

Multiple Choice

Hobart Company produces speakers for PA systems. The speakers are sold to retail music stores for $30. Manufacturing and other costs are as follows: $$\begin{array} { l r l r } \text { Variable costs per unit: } &{ \text { Fixed costs per month: } } \\\text { Direct materials } & \$ 9.00 & \text { Factory overhead } & \$ 120,000 \\\text { Direct labor } & 4.50 & \text { Selling and admin. } & 60,000 \\\text { Factory overhead } & 3.00 & \text { Total } & \$ 180,000 \\\text { Distribution } & 1.50 & & \\\text { Total } & \$ 18.00 & &\end{array}$$ The variable distribution costs are for transportation to the retail music stores. The current production and sales volume is 20,000 per year. Capacity is 25,000 units per year.
A Memphis manufacturing firm has offered a one-year contract to supply speaker parts at a cost of $6.00 per unit. If Hobart Company accepts the offer, it will be able to reduce variable costs by 30 percent and rent unused space to an outside firm for $18,000 per year. All other information remains the same as the original data. What is the effect on profits if Hobart Company buys from the Memphis firm?

• A)decrease of $19,000
• B)increase of $19,000
• C)increase of $6,000
• D)increase of $13,000

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