Question Air Production Company produces pneumatic lifts used to assist emergenc
ID: 2449858 • Letter: Q
Question
Question
Air Production Company produces pneumatic lifts used to assist emergency rescue teams used to assist victims of auto and other accidents. The costs of manufacturing and marketing the pneumatic lifts at the company’s normal volume of 3000 per month are shown in Exhibit 1.
Exhibit 1
Unit manufacturing costs:
Variable materials $495
Variable labor $795
Variable Overhead $475
Fixed Overhead $640
Total unit manufacturing costs $2,405
Unit marketing costs:
Variable $235
Fixed $745
Total unit marketing costs $980
Total unit costs $3,385
Questions:
The following refers to the data given in exhibit 1. Treat each problem separately. Unless otherwise stated, assume a selling price of $4250 per lift. Ignore income taxes. Assume no beginning or ending inventories.
3. A government agency on April 1 offers a contract to Air Production to supply 500 units to supply federal emergency medical teams across the region. The delivery must be made by May 1. Because this is a rush order along with several other rush orders, Air Production plans to produce and sell 4000 units in April. If the government order is accepted, 500 units normally available to regular customers will be lost. The government contract will reimburse Air Production for the government’s share of April production costs, plus pay an additional fixed fee (profit) of $250,000. There are no variable marketing costs incurred on the government contract.
What impact would accepting the government contract special order have on April operating income for Air Products? Explain the impact both financially and from an operations and business perspective.
Please use the image below to format your Excel spreadsheet:
Explanation / Answer
Particulars Per Unit 4000 Units Per Unit 3500 units 500 Units Total Difference Sales 4250 17000000 4250 14875000 2125000 17000000 0 Less: Variable Cost Material 495 1980000 495 1732500 247500 1980000 0 Labour 795 3180000 795 2782500 397500 3180000 0 Overhead 475 1900000 475 1662500 237500 1900000 0 Marketing Cost 235 940000 235 822500 117500 940000 0 Total Variable Cost 2000 8000000 2000 7000000 1000000 8000000 0 Contribution Margin: 4250-2000 2250 9000000 2250 7875000 1125000 9000000 0 Less: Fixed Cost Manufacturing Overhead: (640*3000) 1920000 1920000 0 Marketing Cost: (745*3000) 2235000 2235000 0 Total Fixed Cost 4155000 4155000 0 Add: Additional Fixed Fee 0 250000 250000 Net Income: (9000000-4155000), 9000000-4155000+250000 4845000 5095000 250000 Operating income will increase by 250000