8 of 861) 5-57 Pricing and Confusing Variable and Fixed Costs Kister Electronics

Question

8 of 861) 5-57 Pricing and Confusing Variable and Fixed Costs Kister Electronics had a fixed factory overhead budget for 20X0 of $72 million. The company planned to make and sell 9 million units of a particular communications device. All variable manufacturing costs per unit were $18. The budgeted income statement contained the following Sales Manufacturing cost of goods sold Gross margin Deduct selling and administrative expenses Operating income $252,000,000 234,000,000 18,000,000 9,000,000 $ 9,000,000 For simplicity, assume that the actual variable costs per unit and the total fixed costs were exactly as budgeted. 1. Compute Kister's budgeted fixed factory overhead per unit. 2. Near the end of 20X0, a large computer manufacturer offered to buy 150,000 units for $3.45 million on a one-time special order. The president of Kister stated, "The offer is a bad deal. It's foolish to sell below full manufacturing costs per unit. I realize that this order will have only a

Explanation / Answer

5-57) 1) Budgeted fixed factory overhead per unit = $72m / 9 m units = $8 per unit 2) $ Revenue on 150000 units offered 3.45m Less: Variable costs @ $18 2.70m selling fees paid 0.01m Total variable costs 2.71m Increase in operating income 0.74m If the Kister is operating below its installed capacity, then it is suggested accept the one-time special offer as it increases the opeating income by $0.74m. 3) Factors which president should consider before finally deciding to accept the offer are: a. have extra idle capacity b. don't have any other opportunity c. no labor problems d. no other costs has to incure on the offer order. e. no changes in variable costs. 4) if planned capacity be 4.5m units instead of 9m units, then there will be change in "budgeted fixed factory overhead per unit" and no change in decision on special offer as fixed costs are not considered. Budgeted fixed factory overhead per unit = $72m / 4.50 m units = $16 per unit

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