The following are the Class Company's unit costs of manufacturing and marketing at an output level of 20,000 units per month:
Manufacturing cost
Direct materials $1.00
Direct manufacturing labour 1.20
Variable manufacturing overhead cost 0.80
Fixed manufacturing overhead cost 0.50
Marketing cost
Variable 1.50
Fixed 0.90
The following situations refer only to the preceding data; there is no connection between the situations. Unless stated otherwise, assume a regular selling price of $6 per unit. Choose the best answer to each question. Show your calculations:
Practical concerns:
1. For an inventory of 10,000 units of the high-style pen presented in the balance sheet, how many is the appropriate unit cost to use?
2. The pen is usually produced and sold at the rate of 240,000 units per year (an average of 20,000 per month). The selling price is $6 per unit, which yields total annual revenues of $1,440,000. Total costs are $1,416,000, and operating income is $24,000, or $0.10 per unit. Market research estimates that unit sales could be increased by 10% if prices were cut to $5.80. Assuming the implied cost behaviour patterns continue, what is the expected result?
3. A contract with the government for 5,000 units of the 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:
Sales each month to Alternative A Alternative B
Regular customers 15,000 units 15,000 units
Government 0 units 5,000 units
Operating income under alternative B is greater than that under alternative A by how much?
4. Assume the same data with respect to the government contract as in requirement 3 except that the two alternatives to be compared are as follows:
Sales each month to Alternative A Alternative B
Regular customers 20,000 units 15,000 units
Government 0 units 5,000 units
Operating income under alternative B relative to that under alternative A is?
5. The company wants to enter a foreign market in which price competition is keen. The company seeks a one-time-only special order for 10,000 units on a minimum-unit-price basis. It expects that shipping costs for this order will amount to $0.75 per unit, but the fixed costs of obtaining the contract will be $4,000. The company incurs no variable marketing costs other than shipping costs. Domestic business will be unaffected. The selling price to break even is how much?
6. The company has an inventory of 1,000 units of pens that must be sold immediately at reduced prices. Otherwise, the inventory will become worthless. The unit cost that is relevant for establishing the minimum selling price is ?
7. A proposal is received from an outside supplier who will make and ship the high-style pens directly to the Class Company's customers as sales orders are forwarded from Class's sales staff. Class's fixed marketing costs will be unaffected, but its variable marketing costs will be slashed by 20%. Class's plant will be idle, but its fixed manufacturing overhead will continue at 50% of present levels. How much per unit would the company be able to pay the supplier without decreasing operating income?
8. Assume that, as in requirement 7 a proposal is received form an outside supplier who will make and ship high-style pens directly to the Class company's customers as sale orders are forwarded form Class's sale staff. If the supplier's offer is accepted, the present plant facilities will be used to make a new pen whose unit cost will be:
Variable manufacturing cost $5.00
fixed manufacturing costs $1.00
variable marketing costs $2.00
fixed marketing costs for the new pen $0.50
total fixed manufacturing overhead will be unchanged from the original level given at the beginning of the problem. fixed marketing costs for the new pens are over and above the fixed marketing costs incurred of the marketing the high- style pens at the beginning of the problem. The new pen will sell for $9. the minimum desired operating income on the two pens taken together is $50,000 per year. What is the maximum purchase cost per unit that the Class company should be willing to pay for subcontracting the production of the high-style pens