The San Carlos Company is an electronics business with eight product lines. Inco

Question

The San Carlos Company is an electronics business with eight product lines. Income data for one of the products (XT-107) for June 2011 are as follows: Revenues, 200,000 units at average price of $100 each $20,000,000 Variable costs Direct materials at $35 per unit $7,000,000 Direct manufacturing labor at $10 per unit 2,000,000 Variable manufacturing overhead at $6 per unit 1,200,000 Sales commissions at 15% of revenues 3,000,000 Other variable costs at $5 per unit 1,000,000 Total variable costs 14,200,000 Contribution margin 5,800,000 Fixed costs 5,000,000 Operating income $ 800,000 Abrams, Inc., an instruments company, has a problem with its preferred supplier of XT-107. This supplier has had a three-week labor strike. Abrams approaches the San Carlos sales representative, Sarah Holtz, about providing 3,000 units of XT-107 at a price of $75 per unit. Holtz informs the XT-107 product manager, Jim McMahon, that she would accept a flat commission of $8,000 rather than the usual 15% of revenues if this special order were accepted. San Carlos has the capacity to produce 300,000 units of XT-107 each month, but demand has not exceeded 200,000 units in any month in the past year.

Explanation / Answer

1. Contirbution Margin Per Unit will be $44 for the additional 3000 units [(5,800,000 / 200,000 ) + 15]. Contribution margin will therefore increase by $132,000. Operating income will only increase by $132,000 - $8,000 = $124,000.

2. I would disagree with him because the company is actually making more money off this arrangement than at full price. Under the normal arrangement the contribution margin is $29 per unit, which means they would make an extra $87,000 ( 29 * 3,000) However, with this new arrangement they are actually making $124,000. Therfore, San Carlos should continue to offer this deal so long as Abrams is willing to accept an $8,000 flat fee rather than 15% of revenues.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.