Question #3 (15 points) Juett Company produces a single product. The cost of pro
ID: 2503523 • Letter: Q
Question
Question #3 (15 points)
Juett Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 70,000 units per month is as follows:
Direct materials $29.60
Direct labour 5.80
Variable manufacturing overhead 2.50
Fixed manufacturing overhead 17.20
Variable selling & administrative expense 1.80
Fixed selling & administrative expense 6.70
The normal selling price of the product is $72.90 per unit.
An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.10 less per unit on this order than on normal sales.
Required:
a) Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $66.10 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?
b) Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the total opportunity cost of taking on the special order delivered to the overseas customer?
c) Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,300 units for regular customers. What would be the minimum acceptable price per unit for the special order?
Explanation / Answer
Answer:
a.
Variable cost per unit on normal sales:
Direct materials ........................ $29.60
Direct labor ............................ 5.80
Variable manufacturing overhead ......... 2.50
Variable selling & administrative expense 1.80
Variable cost per unit on normal sales $39.70
Variable cost per unit on special order:
Normal variable cost per unit ........... $39.70
Reduction in variable selling & admin. .. 1.10
Variable cost per unit on special order $38.60
Selling price for special order ........... $66.10
Variable cost per unit on special order ... 38.60
Unit contribution margin on special order 27.50
Number of units in special order .......... 2,000
Increase (decrease) in net operating income $55,000
b. The opportunity cost is just the contribution margin on normal sales:
Normal selling price per unit ............. $72.90
Variable cost per unit on normal sales .... 39.70
Unit contribution margin on normal sales .. $33.20
Minimum acceptable price:
C Unit contribution margin on normal sales .. $33.20
Displaced normal sales .................... 1,300
Lost contribution margin displaced sales .. $43,160
Total variable cost on special order ...... $77,200
Total Incremental cost of special order $120,360
Number of units in special order .......... 2,000
Minimum acceptable price on special order $60.18
Answer:
a.
Variable cost per unit on normal sales:
Direct materials ........................ $29.60
Direct labor ............................ 5.80
Variable manufacturing overhead ......... 2.50
Variable selling & administrative expense 1.80
Variable cost per unit on normal sales $39.70
Variable cost per unit on special order:
Normal variable cost per unit ........... $39.70
Reduction in variable selling & admin. .. 1.10
Variable cost per unit on special order $38.60
Selling price for special order ........... $66.10
Variable cost per unit on special order ... 38.60
Unit contribution margin on special order 27.50
Number of units in special order .......... 2,000
Increase (decrease) in net operating income $55,000
b. The opportunity cost is just the contribution margin on normal sales:
Normal selling price per unit ............. $72.90
Variable cost per unit on normal sales .... 39.70
Unit contribution margin on normal sales .. $33.20
Minimum acceptable price:
C Unit contribution margin on normal sales .. $33.20
Displaced normal sales .................... 1,300
Lost contribution margin displaced sales .. $43,160
Total variable cost on special order ...... $77,200
Total Incremental cost of special order $120,360
Number of units in special order .......... 2,000
Minimum acceptable price on special order $60.18