Problem: The Drosselmeier Corporation, located in Munich, makes Christmas nutcrackers and has an annual plant capacity of 2,400 product units. Its predicted operating results (in German marks) for the year are:
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Production and sales of 2,000 units, total sales
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DM 180,000
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Manufacturing Costs
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Fixed (total)
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60,000
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Variable (per unit)
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26
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Selling and administrative expenses
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Fixed (total)
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30,000
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Variable (per unit)
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10
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In your groups, compute the following, ignoring income taxes:
Q1. There is a special order of 300 units to be sold at DM 40 per unit. Compute new net income...you can state your assumptions about what costs are relevant and irrelevant. There is no one right set of assumptions.
Q2. Now Drosselmeier wants a target net income of 45,000 DM. It wants to understand how and if it can achieve it. For each method, compute the 1) number of units it must sell, 2) independently, how it might reduce costs - variable and fixed, 3) how are these costs best communicated to production so cost savings can be realized, and 4) a different selling price. Then discuss the limitations...do not limit the computations for what you think.
Q3. Assume capacity and sales can be doubled to 4,800 units. Again compute new net income if facilities costing 500,000DM are added at 5 year life. This is a straight forward computation.