Mazeppa Corporation sells relays at a selling price of $28 per unit. The company
ID: 2582642 • 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 $4 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?
Explanation / Answer
Variable cost per unit of special order = $ ( 8.00 + 6.00 + 6.00 + 2.00) = $ 22.
a-1. Unit price to be charged for the special order = $ 22 + $ 4 = $ 26.
b-1. If the company is operating at full capacity, operating income = 160,000 x $ ( 28 - 20) - 160,000 x $ 3.00 = $ 800,000.
Target operating income = $ 860,000.
Target Contribution Margin = $ 860,000 + $ 480,000 = $ 1,340,000.
Let the unit contribution margin from the special order be C.
130,000 x $ 8 + 30,000 x C = $ 1,340,000.
or C = $ 10
Price that the distributor should be charged = $ 10 + $ 22 = $ 32.