Ovation Company has a single product called a Bit. The company normally produces
ID: 2413984 • Letter: O
Question
Ovation Company has a single product called a Bit. The company normally produces and sells 64,800 Bits each year at a selling price of $47 per unit. The company’s unit costs at this level of activity are given below:
Ovation Company has a single product called a Bit. The company normally produces and sells 64,800 Bits each year at a selling price of $47 per unit. The company's unit costs at this level of activity are given below: Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses $10.50 7.50 3.60 4.80 ($311,040 total) 6.60 2.70 ($174,960 total) Total cost per unit $35.70 A number of questions relating to the production and sale of Bits follow. Each question is independent. Required: 1. Assume that Ovation Company has sufficient capacity to produce 97,200 Bits each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the current 64,800 units each year if it were willing to increase the fixed selling expenses by $105,000 a. Calculate the incremental net operating income Incremental operating income b. Would the increased fixed selling expenses be justified? O Yes 0 2. Assume again that Ovation Company has sufficient capacity to produce 97,200 Bits each year. A customer in a foreign market wants to purchase 16,200 Bits. Import duties on the Bits would be $1.70 per unit, and costs for permits and licences would be $7,290. Both import duties and permits and licenses will be paid by Ovation. The only selling costs that would be associated with the order are $3.00 per unit shipping cost. Compute the per unit break-even price on this order. (Do not round your intermediate calculations. Round your answer to 2 decimal places.) Break-even price per unit 3. The company has 1,000 Bits on hand that have some irregularities and are therefore considered to be seconds." Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What unit cost figure is relevant for setting a minimum selling price? (Round your answer to 2 decimal places.) Relevant unit costExplanation / Answer
Calculation of contribution per unit
Particulars
Amount
Sales
47
Direct Material
10.5
Direct Labor
7.5
Variable Manufacturing Cost
3.6
Variable Selling Cost
6.6
Contribution
18.8
Calculation of net operation profit without any change
Particulars
Amount
Sales unit
64,800
Contribution (64,800*18.8)
1,218,240
Fixed Manufacturing cost
311,040
Fixed Selling cost
174,960
Net operating income
732,240
Calculation of net operation profit with 25% Increase in sales
Particulars
Amount
Sales unit (64800*1.25)
81,000
Contribution (81000*18.8)
1,522,800
Fixed Manufacturing cost
311,040
Fixed Selling cost (174,960+105,000)
279,960
Net operating income
931,800
2)
Particulars
Amount
Total Fixed Cost (311040+174960+105000+7290)
598,290
Contribution
16.90
BEP
35,400
Since selling cost is reduced to 3 so there is saving of 3.6 per unit however import duty will reduce the contribution per unit by 1.7. So Contribution per unit is 18.8+3.6-1.7=16.9
3)
Variable cost per unit is relavent for setting minimum selling price. which is 28.20
4)
if plant is closed the
Manufacturing cost = 186,624
Selling cost = 139,968
Total = 326,592
If plant is not Closed
Units = 64800*2/12*30/100 = 3,240
Contribtion = 60,912
Fixed cost =486,000
loss = 425,088
Savini on closure = 98,496
Particulars
Amount
Sales
47
Direct Material
10.5
Direct Labor
7.5
Variable Manufacturing Cost
3.6
Variable Selling Cost
6.6
Contribution
18.8
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