Question #2 Consider the following information, prepared based on monthly produc
ID: 2427526 • Letter: Q
Question
Question #2
Consider the following information, prepared based on monthly production and sales of 50,000 units:
Category
Cost per Unit
Variable manufacturing costs
$8.00
Variable marketing costs
$3.00
The firm has total fixed costs of $250,000 and currently sells the product for $15 per unit.
Assume the company is producing and selling 50,000 units per month. It is considering an arrangement where an outside manufacturer would produce and ship the product directly to customers. Under this arrangement, variable marketing costs would decrease 40% per unit and $80,000 in fixed costs would be avoided. What is the maximum amount per unit the company would be willing to pay to the outside manufacturer?
List and describe other factors that should be taken into consideration when deciding whether to accept this offer. Be specific in your responses.
Category
Cost per Unit
Variable manufacturing costs
$8.00
Variable marketing costs
$3.00
Explanation / Answer
maximum amount per unit the company would be willing to pay to the outside manufacturer
= cost before accepting order - cost after accepting order
= ($8 + $3) - ($1.2 + $80000 / 50000 units)
= $11 - ($1.2 + $1.6)
= $11 - $2.8
= $8.2 per unit
NoteS:-
net income/(loss) before accepting the offer:
sale( 50000 * $15) = $750000
less: variable manufacture cost ($8 * 50000) = $400000
less:Variable marketing costs($3 * 50000) = $150000
less: fixed cost =$250000
Net income = ($50000)
net income/(loss) after accepting the offer:
sale( 50000 * $15) = $750000
less:Variable marketing costs([$3 - {40%*$3}] * 50000) = $90000
less: fixed cost = $80000
Net income = $580000
Note:- $80000 in fixed cost is avoided that means it will become variable cost
Therefore it is a profitable situation for the company to