Bonovich Company produces a single product with sales of 40,000 units and has th
ID: 2488229 • Letter: B
Question
Bonovich Company produces a single product with sales of 40,000 units and has the following unit costs:
Direct materials...................... $16
Direct labor.......................... 7
Variable overhead..................... 7
Fixed overhead ....................... 10*
*Based on total fixed overhead of $400,000 and units produced of 40,000. For the coming period, Bonovich has received an offer of a government contract of 10,000 units. The contract specifies a payment of $32 per unit plus a fixed fee of $20,000 for the contract. The company's normal selling price is $40 per unit. a. Assume that, if the contract is accepted, regular production and sales will be unaffected, and no alternative uses of the productive capacity are possible. What will the profit be? Show calculations. b. Assume that normal production will be decreased by one unit for every unit manufactured to fill the contract. What will the profit be? Show calculations
Explanation / Answer
a.
Contribution margin per unit = Selling price – Variable cost
Variable cost = Direct materials + Direct labor + Variable overhead = $16 + $7 + $7 = $30 per unit
Contribution margin per unit for existing production = $40 - $30 = $10 per unit
Contribution margin for existing production = $10 * 40,000 = $400,000
Contribution margin per unit from contract = $32 - $30 = $2 per unit
Contribution margin from contract = $2 * 10,000 units = $20,000
Profit = Contribution margin from existing production + Contribution margin from contract + Contract fee – Fixed overhead = $400,000 + $20,000 + $20,000 - $400,000 = $40,000
b.
Profit = $40,000 – Contribution margin lost for 10,000 units of existing production = $40,000 – ($10*10,000) = -$60,000