Brant Microwave manufactures a line of microwave ovens that it sells under its name and under various brand names for large retail chains. There are 40 assembly workers, and each is paid an annual salary of $70,000. Each worker works approximately 1,650 hours per year. The resulting labor rate is therefore $42.42 ($70,000/1,650) per hour. The number of assembly workers, which is the constraining factor of production, cannot be increased. 

Brant Microwave is currently operating at 90% of capacity (capacity is determined by available labor hours) and is actively considering an offer from Steve’s Discount Warehouse. Steve has offered to buy 10,000 microwaves, and Brant Microwave has developed the following cost report for this microwave:

There are two components of the fixed manufacturing overhead assigned to this product. There is the regular fixed manufacturing overhead that is applied to all production at the rate of $20 per labor hour. Also, there is a cost to develop a mold that will be used to make the plastic cabinet for this product. The mold cost would be $25,000, so a $5.00 cost is assigned to each of the 10,000 units in the offer. The mold would be worthless when this order is completed. By comparison, the sales manager has provided the data below for what is currently the least profitable product that Brant Microwave makes—at a current volume of 15,000 units per year.  

The sales manager is eager to accept Steve’s offer in order to use the idle capacity but feels that the price offer is far too low to justify accepting it. The sales manager has said that this offer is unacceptable because it is less profitable than what is currently viewed as the least profitable product in the Brant Microwave lineup. 

Required 

(a) Should this offer be accepted? 

(b) Suppose now that the order from Steve is for 20,000 units and if the order is accepted all 20,000 units must be produced. What is the minimum price per unit for Steve’s order that would be acceptable to Brant Microwave?

Transcribed Image Text:

Price per unit Costs Materials.... Labor (0.5 hours @ $42.42). Fixed manufacturing overhead. Profit per unit... ... $50.00 21.21 15.00 $80.00 86.21 $ (6.21)