Glade Company produces a single product. The costs of producing and selling a si
ID: 2384904 • Letter: G
Question
Glade Company produces a single product. The costs of producing and selling a single unit of this product at the company’s current activity level of 7,800 units per month are:
The normal selling price is $19 per unit. The company’s capacity is 10,600 units per month. An order has been received from a potential customer overseas for 2,800 units at a price of $16.00 per unit. This order would not affect regular sales.
If the order is accepted, by how much will monthly profits increase or decrease? (The order would not change the company’s total fixed costs.) (Input the amount as a positive value. Omit the "$" sign in your response.)
Assume the company has 500 units of this product left over from last year that are inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost is relevant for establishing a minimum selling price for these units? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Direct materials $ 1.60 Direct labor $ 3.00 Variable manufacturing overhead $ .60 Fixed manufacturing overhead $ 4.45 Variable selling and administrative expenses $ 1.00 Fixed selling and administrative expenses $ 2.00Explanation / Answer
As company caapcity is 10600 but current volume is 7800 which is absorbiig the ful fixed costs, we use current volume of production to calculate total fixed costs Total Fixed cost = 7800*($4.45+$2.00) = $50,310 Lets calculate the Var cost pu for the product :- Direct materials $ 1.60 Direct labor $ 3.00 Variable manufacturing overhead $ .60 Variable selling and administrative expenses $ 1.00 --------------------------------------------------------------- Total Var cost pu = $6.20 Cont pu = SP pu - Var cost pu = 19-6.20 = $12.80 Total Cont = Cont pu * No of units = $12.80*7800 = $99,840 Less Fixec costs = $50,310 --------------------------------- Net Income = $49,530 ..................(A) New Order SP pu = $16 SO COnt pu from new order = $16-$6.20 = $9.80 SO Total COnt = 2800* $9.80 = $27,440 So by accepting the special order, Monthly profits would increase by $27,440 ....Ans(A) For Inferior product, the Var cost of Dir Mat & Dir Lab are sunk costs & are not relevant for decision making. As the product will be sold through regular channnels, Var S&A expenses wil be incurred which are $1 pu. So Minimum Selling price will be $1.00 pu
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