Troy Manufacturing, Inc., produces exercise bicycles. The costs of manufacturing and marketing exercise bicycles at the company's normal volume of 3,000 units per month follow:

Unless otherwise stated, assume that the situations described in the questions are not connected; treat each independently. Unless otherwise stated, assume a regular selling price of $1,000 per unit and a volume of 3,000 bicycles per month.
a. Market research estimates that volume could be increased to 3,500 units, which is well within production capacity limitations, if the price were cut from $1,000 to $900 per unit. Assuming that the cost behavior patterns implied by the data given above are correct, would you recommend taking this action? What would be the impact on monthly sales, costs, and income?
b. On March 1, the Veterans Administration offers Troy a contract to supply 500 units to Veterans Administration hospitals for a March 31 delivery. Because of an unusually large number of rush orders from its regular customers, Troy plans to produce 4,000 units during March, which will use all available capacity. If it accepts the government order, it would lose 500 units normally sold to regular customers to a competitor. The government contract would reimburse its ‘‘share of March manufacturing costs'' plus pay a $50,000 fixed fee (profit). (No variable marketing costs would be incurred on the government's units.) What impact would accepting the government contract have on March income? (Part of your problem is to figure out the meaning of ‘‘share of March manufacturing costs.'')
c. Troy has an opportunity to enter a new market. An attraction of the new market is that its demand is greatest when the domestic market's demand is quite low; thus, idle production facilities could be used without affecting normal business.
An order for 1,000 units is being sought at a below-normal price to enter this market. For this order, shipping costs will total $75 per unit; total (marketing) costs to obtain the contract will be $4,000. No other variable marketing costs would be required on this order, and it would not affect domestic business. What is the minimum unit price that Troy should consider for this order of 1,000 units?
d. An inventory of 200 units of an obsolete model of the exercise bicycle remains in the stockroom. These must be sold through regular channels (thus incurring variable marketing costs) at reduced prices or the inventory will soon be valueless. What is the minimum acceptable selling price for these units?
e. Troy Manufacturing receives a proposal from an outside contractor who will make and ship 1,000 units per month directly to Troy Manufacturing's customers. The proposal would not affect Troy Manufacturing's fixed nonmanufacturing costs, but its variable nonmanufacturing costs would decline by 20 percent for these 1,000 units produced by the contractor. Troy Manufacturing's plant would operate at two-thirds of its normal level. Total fixed manufacturing costs would decline by 30 percent.
What in-house unit cost should the firm use to compare with the quotation received from the supplier? Should the firm accept the proposal for a price (that is, payment to the contractor) of $600 per unit?
f. Assume the same facts as in part e., except that the firm will use idle facilities to produce 800 low-impact bicycles per month that would be sold to people with injuries or other physical impairments. It can sell these low-impact bicycles for $1,200 each, while the costs of production would be $700 per unit variable manufacturing cost. Variable nonmanufacturing costs would be $100 per unit. Fixed nonmanufacturing and manufacturing costs will not change whether the firm manufactures the original 3,000 regular bicycles or the mix of 2,000 regular bicycles plus 800 low-impact bicycles. What is the maximum purchase price per unit that Troy Manufacturing should be willing to pay the outside contractor? Should it accept the proposal for a price of $600 perunit?

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TROY MANUFACTURING Costs per Unit Unit Manufacturing Costs Variable Materials ariable Labor Variable Overhead Fixed Overhead $100 150 50 200 $500 Total Unit Manufacturing Costs Unit Nonmanufacturing Costs Variable Fixed $100 100 Total Unit Non manufacturing Costs... Total Unit Costs 200 $700