Problem:
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: $6
Direct labor: $4
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.
Q1. Assume that Mazeppa is currently operating at a level of 100,000 units. What unit price should it charge the distributor if it wishes to increase operating income by $2 for each unit included in the special order?
Q2. Assume that Mazeppa is currently operating at full capacity. To fill the special order, regular customers will have to be turned away. Now what unit price should it charge to the distributor if it wishes to increase total operating income by $60,000 more than it would be without accepting the special order?