COOL COMPANy The following are the Cool Company\'s projected unit costs at a nor

Question

COOL COMPANy

The following are the Cool Company's projected unit costs at a normal level of 20,000 units per month. These costs are approximately the same as for the prior year. Sales are expected to be uniform throughout the year, therefore annual volume is projected to be 240,000 units. Assume their fiscal year ends on December 31.

Manufacturing costs:

Variable direct cost (materials & labor)      $ .60                              

Variable manufacturing overhead                3.00

                                      Fixed overhead cost                                       .75

Selling and other costs:

Variable (shipping)                                        1.50

                                        Fixed                                                             2.00

The following independent situations refer only to the data given above; there is no connection between the situations except where explicitly stated. Unless stated otherwise, assume a regular selling price of $8.50 per unit. Income tax considerations are to be ignored. You should also assume that units are not produced until they are needed for sales (unless specifically indicated otherwise) – a “pure” JIT approach.

REQUIRED: Determine the answer to each of the following situations. Support each answer with summarized computations and a list of any assumptions on which they are based. If you foresee any significant qualitative factors in any of the situations described below, clearly identify them.

5.         The company desires to enter a foreign market, in which price competition is keen. A bid has been requested from Coaster for 10,000 units of our product at the lowest possible unitprice. Because of different packaging requirements in the other country, it is expected that variable selling costs for this order will change to $.85 per unit, and a tariff of $18,000 (total cost for the 10,000 units) will be charged. Assume that we have the capacity to meet the order and domestic business will be unaffected. What is the minimum unit selling price we can quote for this order?

* SEE NOTE BELOW

6.         At the beginning of the year, the company has an inventory of 1,000 units of this item left over from last year's model. These units are obsolete and therefore cannot be sold at the regular price. However, they must be sold through Coaster's normal distribution channels. What is the minimum unit selling price for these items?

* SEE NOTE BELOW

7.         A proposal is received from an outside supplier who will make and ship this item directly to Coaster's customers as sales orders are forwarded from our sales staff. Coaster's total fixed selling costs will be unaffected, but its variable selling costs will be slashed by 85%. Coaster's plant will be idle, but its total fixed manufacturing overhead would continue at 20% of present levels. What unit cost should the company use to compare with the quotation received from the supplier?

            8.        Assume the same facts as in No. 7 except that if the supplier's offer is accepted, the present plant facilities will be used to make a product whose unit costs will be:

Variable manufacturing costs                     $4.25

Fixed manufacturing costs                             .60

Variable selling costs                          2.00

Fixed selling costs                                          .40

Since the new product will be produced in the existing facilities, total fixed factory overhead incurred in the present plant will be unchanged, and total fixed selling costs will remain the same (the amount shown for the new product represents an allocation of the total cost). The new product will sell for $9.00 per unit. The total minimum desired net profit on the two products taken together is $500,000 per year.

What is the maximum purchase cost per unit that the Class Company would be willing to pay for subcontracting the old production?

* SEE NOTE BELOW

* NOTE:            In the questions referenced to this note, Coaster would not necessarily sell at these minimum prices or pay these maximum prices, but they would provide us with a frame of reference for negotiation!

Explanation / Answer

Minimum unit selling price we can quote for this order=

as we have the capacity to meet the order and domestic business, the selling price would be

profit = 0.65

Manufacturing costs:

Variable direct cost (materials & labor) 1.80                              

Variable manufacturing overhead                3.00

Selling and other costs:

Variable (shipping) .85

Minimum selling price = 6.3

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