Case Problem: Below are The Great Pen Company unit costs of manufacturing and ma
ID: 2585431 • Letter: C
Question
Case Problem: Below are The Great Pen Company unit costs of manufacturing and marketing a high-style pen at an estimated out-put level of 20,000 units per month. Manufacturing costs: Direct materials Direct manufacturing labor variable manufacturing indirect costs Fixed manufacturing indirect costs $1.00 1.20 0.80 0.50 Marketing costs Variable Fixed $1.50 REQUIRED Unless stated otherwise, assume each pen sells for $6.00 each. Show all calculations. 1. A contract with the government for 5,000 pens calls for the reimbursement of all manufacturing costs plus a fixed fee of $1,000. No variable marketing costs are incurred on the government contract. You are asked to compare the following two alternatives: Alternative B 15,000 pens 15,000 pens 0 pens 5,000 pens Sales Each Month toAlternative A Regular customers Government On a per month basis, operating income under Alternative B is greater than under Alternative A by a. $1,000 b. $2,500 c. $3,500 d. $300 e. None of these.Explanation / Answer
The correct answer is Option C i.e. $3,500
Revenue will increase by = (5,000 pens x $3.50) + $1,000
.........................................= $18,500
Cost will increase by = 5,000 pens x $3
..................................= $15,000
Operating Income will increase by = $18,500 - $15,000
.......................................................= $3,500