Decision on proposal where contract price is lesser than variable cost
Generators, Inc. produced emergency backup generators for use in large commercial buildings. The costs of manufacturing and marketing the generators at the company's normal volume of 3,000 units per month are shown .
Costs per Unit for Generators
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Unit Manufacturing costs:
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Variable Materials
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$1,000
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|
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Variable Labor
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1,500
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Variable Overhead
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500
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Fixed Overhead
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1,200
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Total Manufacturing Cost
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$4,200
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Unit Marketing Costs:
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Variable
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500
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Fixed
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1,400
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|
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Total Marketing Cost
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1,900
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Total Unit Cost:
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$6,100
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The following questions refer only to the data given above. Unless otherwise stated, assume there is no connection between situations described in each of the questions, each is to be treated independently. Unless otherwise stated, a regular selling price of $7,400 per unit should be assumed.
A proposal is received from an outside contractor who will manufacture and ship 1,000 generators per month directly to Redi-Watt customers as orders are received from Redi-Watt's sales force. Redi-Watt's fixed marketing costs would be unaffected but its variable marketing costs would be cut by 20% (to $400 per unit) for these 1,000 units produced by the contractor. Redi-Watt's plant would operate at two-thirds of its normal level, and fixed manufacturing costs would be cut by 30% to $2,520,000. What in house costs should be used to compare with the proposal received from the contractor? Should the proposal be accepted for a price (paid to the contractor) of $4,250 per unit?