Mike Jones, Inc. has the capacity to produce 20,000 CDs a month, and currently m
ID: 2518547 • Letter: M
Question
Mike Jones, Inc. has the capacity to produce 20,000 CDs a month, and currently makes and sells 13,000 CDs a month. CDs normally sell for $9 each, and cost an average of $6 to make, including fixed costs. The monthly fixed costs are $39,000. Tupac Company has offered to buy 1,000 CDs at $7 each.
Assuming the same story, but Coyote's offer is for 21,000 units (all or nothing), should the offer be accepted?
a. Yes or no
b. Contribution margin for Displaced customers
c. Contribution margin for Mike Jones, Inc’s offer
d. Difference in money received if one or the other is chosen
Explanation / Answer
**Fixed cost per unit : 39000/20000=$1.95 per unit
variable cost of sales :6-1.95= 4.05 per unit
a)Since the contribution margin has decreased if coyote offer is accepted (from 64350 to 61950 ) ,offer should not be accepted.
b)Contribution margin for Displaced customers :64350
c) Contribution margin for Mike Jones, Inc’s offer = 61950
d)Difference in money received if one or the other is chosen = 64350-61950=-2400
Fixed cost is ignored as it will be same under both alternatives.
Income if 13000 unit is sold to outside customers Income if 21000 unit sold to coyote sales 13000*9=117000 21000*7=147000 less:variable cost 4.05*13000= (52650) 21000*4.05=(85050) Contribution margin 64350 61950