AAA Lock Manufacturing Co. makes and sells several models of locks. The cost rec
ID: 2389301 • Letter: A
Question
AAA Lock Manufacturing Co. makes and sells several models of locks. The cost records for the ZForce lock show that manufacture costs total $29.00 per lock. An analysis of this amount indicates that $16.75 of the total cost has a variable cost behavior pattern, and the remainder is an allocation of fixed manufacturingoverhead. The normal selling price of this model is $38.75 per lock. A chain store has offered to buy 15,000
Zforce locks from AAA lock at a price of $20.00 each to sell in a market that would not compete with AAA Lock regular business. AAA lock has manufacture capacity available and could make these locks without incurring additional fixed manufacturing overhead.
Explanation / Answer
Total cost = $29 Variable cost = $16.75 Fixed Cost = 29 - 16.75 = $12.25 Since Zforce has excess manufacturing capacity, there will be increase in operating income by 15000 x (20 - 16.75) = $48750 Hope this helps!