Centrum Manufacturing makes a single product with the following attributes:

Product per Unit

Price $130.00

Variable costs per unit:

Direct materials $30.00

Direct labor $40.00

Total VC $70.00

Contribution margin per unit $60.00

Fixed costs per unit $20.00

Gross margin per unit $40.00

Direct labor is paid $20 per hour, and each unit of the product requires 2 labor hours. Fixed manufacturing overhead is applied to products at the rate of $10 per direct labor hour.

Required:

a. Centrum Manufacturing has received an offer from a new customer to buy 20 units of a modified version of the existing product. The modification would require an additional $15 of direct materials cost and an additional 0.50 labor hours for each unit. Centrum Manufacturing has enough idle direct labor capacity to fill this order without disrupting existing production and sales. What is the minimum price that Centrum Manufacturing should accept per unit for this modified product?

b. Assume now that Centrum Manufacturing is operating at its direct labor hour capacity and would need to displace some of its existing production to accept this offer to purchase 20 units of the modified product. What is the minimum price that Centrum Manufacturing should accept per unit for this modified product?

Answer rating: 100% (QA)

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