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.