Mazeppa Corporation sells relays at a selling price of $28 per unit. The company
ID: 2437181 • Letter: M
Question
Mazeppa Corporation sells relays at a selling price of $28 per unit. The company's cost per unit, based on full capacity of 160,000 units, is as follows: Direct materials $ 8 Direct labor 6 Overhead (2/3 of which is variable) 9 Mazeppa has been approached by a distributor in Montana offering to buy a special order consisting of 30,000 relays. Mazeppa has the capacity to fill the order. However, it will incur an additional shipping cost of $2 for each relay it sells to the distributor.
a-1. Assume that Mazeppa is currently operating at a level of 100,000 units. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $3 per unit?
a-2. What is your interpretation of the changes to the contribution margin per unit and the operating income on account of the increase in selling price?
b-1. Assume that Mazeppa is currently operating at full capacity. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $60,000 more than it would be without accepting the special order?
b-2. What is your interpretation of the changes to the contribution margin per unit and the operating income on account of the unit price charged to the distributor?
Assume that Mazeppa is currently operating at a level of 100,000 units. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $3 per unit?
What is your interpretation of the changes to the contribution margin per unit and the operating income on account of the unit price charged to the distributor?
Assume that Mazeppa is currently operating at full capacity. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $60,000 more than it would be without accepting the special order?
What is your interpretation of the changes to the contribution margin per unit and the operating income on account of the unit price charged to the distributor?
Explanation / Answer
Part a:
Cost of each unit for 30000 additional units
Particulars
Amount ($)
Direct materials
8.00
Direct labour
6.00
Overhead (9 x 2/3)
6.00
Total variable costs
20.00
Add: Additional shipping costs
2.00
Relevant cost of each unit for additional 30000 units
22.00
Add: Profit
13.00
Unit price to be charged for 30000 units
35.00
Units
Existing production
100000
Additional order
30000
Total
130000
Additional profit to be earn (130000 x 3) ($)
390000
Profit to be added to each unit in additional 30000 units (390000/30000) ($)
13
Particulars
Amount ($)
Amount ($)
Selling price
35.00
Less:
Direct materials
8.00
Direct labour
6.00
Overhead (9 x 2/3)
6.00
Total variable costs
20.00
Add: Additional shipping costs
2.00
Relevant cost of each unit for additional 30000 units
22.00
Contribution margin per unit
13.00
Part b:
Particulars
Amount ($)
Direct materials
8.00
Direct labour
6.00
Overhead (9 x 2/3)
6.00
Total variable costs
20.00
Add: Additional shipping costs
2.00
Relevant cost of each unit for additional 30000 units
22.00
Add: Profit to be earned
2.00
Selling price to be charged for each additional unit for 30000 units
24.00
Additional order
30000
Additional profit to be earn (60000 / 30000)
2
Profit to be added to each unit in additional 30000 units (390000/30000) ($)
2
Particulars
Amount ($)
Amount ($)
Selling price
24.00
Less:
Direct materials
8.00
Direct labour
6.00
Overhead (9 x 2/3)
6.00
Total variable costs
20.00
Add: Additional shipping costs
2.00
Relevant cost of each unit for additional 30000 units
22.00
Contribution margin per unit
2.00
Cost of each unit for 30000 additional units
Particulars
Amount ($)
Direct materials
8.00
Direct labour
6.00
Overhead (9 x 2/3)
6.00
Total variable costs
20.00
Add: Additional shipping costs
2.00
Relevant cost of each unit for additional 30000 units
22.00
Add: Profit
13.00
Unit price to be charged for 30000 units
35.00