Reichert & LaPlante (RL), Inc., currently produces and sells the “Defenseman” br
ID: 2426463 • Letter: R
Question
Reichert & LaPlante (RL), Inc., currently produces and sells the “Defenseman” brand of Hockey gloves at a price of $30 per unit (pair). Cost per unit, based on operating at full capacity of 300,000 units per year, is:
Direct Materials
$8
Direct Labor
$7
Overhead (3/4 of which is fixed & allocated)
$8
a) A special order inquiry to buy 50,000 pair was received from Joseph & Elliot (JE) Co., an overseas distributor. Additional costs of $1 per pair would be incurred by RL to ship the product overseas to JE Co. RL, Inc. has sufficient existing capacity to manufacture the additional units. To best prepare for potentially difficult negotiations with JE, what amount should RL, Inc. set as the minimum (floor) selling price per unit to cover all of the relevant costs of production? Explain your answer.
b) Referring to part “a”, what minimum per unit selling price should RL, Inc. charge if the company requires an incremental pretax profit of $100,000 on this special order? Explain your answer, showing all computations below.
c) Referring to part “a”, what minimum per unit selling price should RL, Inc. charge if the company requires an incremental after-tax profit of $100,000 on this special order? Assume a 20% income tax rate and round to a maximum of 2 decimals. Show all work.
d) Referring to part “a”, what would be the minimum per unit selling price if no excess production capacity existed (i.e. the company is currently producing, and a market exists to sell, all 300,000 pairs)? Provide a defendable explanation concerning this Chp 6 mgmt decision below.
Direct Materials
$8
Direct Labor
$7
Overhead (3/4 of which is fixed & allocated)
$8
Explanation / Answer
a) A special order inquiry to buy 50,000 pair was received from Joseph & Elliot (JE) Co., an overseas distributor. Additional costs of $1 per pair would be incurred by RL to ship the product overseas to JE Co. RL, Inc. has sufficient existing capacity to manufacture the additional units. To best prepare for potentially difficult negotiations with JE, what amount should RL, Inc. set as the minimum (floor) selling price per unit to cover all of the relevant costs of production?
Sol) the minimum selling price would be the variable cost of the product.
varaible cost = material cost + labour cost + variable overhead cost + additional variable cost
here varaible overhead cost = Total overhead cost - fixed portion
= (300,000 * $8 per unit ) - (300,000 * $8 per unit )*3/4
= 2,400,000 - (2,400,000 *3/4) = 2,400,000 - 1,800,000
=600,000 FOR 300,000 units = $2 per unit is the variable cost
Therefore minimum selling price = material cost + labour cost + variable overhead cost + additional variable cost
= 8 + 7 + 2 + 1 = $18 is the minimum selling price per unit to cover all of the relevant costs of production.
b) Referring to part “a”, what minimum per unit selling price should RL, Inc. charge if the company requires an incremental pretax profit of $100,000 on this special order?
Sol) to get a profit of $100,000 on special order, company need to add the profit portion to its cost.
as per above computation our selling price is $18, so we need to add pre profit to this minimum cost
pre profit per unit = 100,000 / 50,000units = $2
Therefore new selling price would be = 18 + 2 = $20
c) Referring to part “a”, what minimum per unit selling price should RL, Inc. charge if the company requires an incremental after-tax profit of $100,000 on this special order? Assume a 20% income tax rate and round to a maximum of 2 decimals.
Sol) to get after tax profit i.e, 100,000 we need to convert after tax profit to before tax profit,
to convert, we need to multiply 100+tax rate divide by 100% to 100,000
= 100,000 * 120 /100 = 120,000 is the before tax profit
before tax profit per unit = 120,000 / 50,000 units = $2.4
new selling price = 18 + 2.4 = $20.4
d) Referring to part “a”, what would be the minimum per unit selling price if no excess production capacity existed (i.e. the company is currently producing, and a market exists to sell, all 300,000 pairs)?
to compute the minimum selling price for special order, we need to compute the contribution foregone by existing external market.
when company has no excess capacity to produce for special order then they need to trasfer their production of existing market to the special oder. the computation will be as follows:
minimum selling price = variable cost + contribution foregone for external market
here we know the variable cost for special oder = $18
contribution foregone for external market = selling price for external market - variable cost for external market
= 30 - (8 + 7 + 2)
=30 - 17 = $13 contribution per unit for external market
minimum selling price = variable cost + contribution foregone for external market
= 18 + 13 = $31 is the minimum selling price