Hobart Company Produces Speakers for PA Systems

question 13

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: 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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Definitions:

Amortized

Gradually reducing a debt through regular payments of both principal and interest.

Compounded Monthly

The process of calculating interest on both the initial principal and the accumulated interest from previous periods on a monthly basis.

Amortized

Refers to the process of gradually reducing debt through regular payments that cover both interest and principal over a set period.

Compounded Monthly

This process involves the reinvestment of interest, so each month's interest earning is based on the principal plus the previously earned interest.