Question

Following are the unit costs of making and selling a single product at a normal level of 5,000 units per month and a current unit selling price of $90:
Manufacturing costs
Direct materials ............ $35
Direct labor ............... 12
Variable overhead ............. 8
Fixed overhead (total for the year, $300,000) . 5
Selling and administrative expenses
Variable ............... 15
Fixed (total for the year, $480,000) ...... 8
Consider each requirement separately. Label all computations, and present your solutions in a form that will be comprehensible to the company president.
1. This product is usually sold at a rate of 60,000 units per year. It is predicted that a rise in price to $98 will decrease volume by 10%. How much may advertising be increased under this plan without having annual operating income fall below the current level?
2. The company has received a proposal from an outside supplier to make and ship this item directly to the company’s customers as sales orders are forwarded. Variable selling and administrative costs would fall 40%. If the supplier’s proposal is accepted, the company will use its own plant to produce a new product. The new product would be sold through manufacturer’s agents at a 10% commission based on a selling price of $40 each. The cost characteristics of this product, based on predicted yearly normal volume, are as follows.
Per Unit
Direct materials ............ $ 6
Direct labor .............. 12
Variable overhead ........... 8
Fixed overhead ............ 6
Manufacturing costs ......... $32
Selling and administrative expenses
Variable (commission) . 10% of selling price
Fixed ................ $ 2

What is the maximum price per unit that the company can afford to pay to the supplier for sub- contracting production of the entire old product? Assume the following:
● Total fixed factory overhead and total fixed selling expenses will not change if the new product line is added.
● The supplier’s proposal will not be considered unless the present annual net income can be maintained.
● Selling price of the old product will remain unchanged at $90.
● All $300,000 of fixed manufacturing overhead will be assigned to the new product.



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  • CreatedNovember 19, 2014
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