HJM Auto Parts Makes a Muffler/pipe Assembly for a Cost

question 42

Essay

HJM Auto Parts makes a muffler/pipe assembly for a cost of $45 each ($10 fixed and $35 variable) and then sells it for $68.The opportunity exists to modify this assembly (to a more fuel efficient model) for additional direct materials and labor cost of $5 per unit.The new muffler/pipe model is expected to sell for $80.00 each.Variable selling and distribution costs would be the same at $10 per unit.Projected sales volume is 60,000 units per year for the new model, the same level of sales as for the current assembly.Labor resources are very tight at present but machine capacity is underutilized.
Required:
1.Should HJM modify the existing assembly?
2.What would be the increase/decrease in profit if HJM modifies the assembly?
3.How will the labor constraint affect the decision?

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Definitions:

Accounting Treatments

Methods or procedures applied in preparing and presenting financial statements, based on guidelines from accounting standards.

Credit Risk

The potential for loss due to a borrower's failure to make payments on any type of debt.

Principal

The original amount of a debt or investment before interest.

Interest Payments

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