Richter Company has a single product called a Wim. The company normally produces

Question

  

Richter Company has a single product called a Wim. The company normally produces and sells 72,000 Wims each year at a selling price of $37 per unit. The company’s unit costs at this level of activity are given below:

  Direct materials

$

6.10    

  Direct labor

10.00    

  Variable manufacturing overhead

3.70    

  Fixed manufacturing overhead

5.00    

  Variable selling expenses

4.00    

  Fixed selling expenses

5.70    

  Total cost per unit

$

34.50    

A number of questions relating to the production and sale of Wims are given below. Each question is
independent.

Required:

1.

Assume that Richter Company has sufficient capacity to produce 79,200 Wims each year without any increase in fixed manufacturing overhead costs. The company could increase sales by 10% above the present 72,000 units each year if it were willing to increase the fixed selling expenses by $150,000.

a.

Calculate the incremental net operating income. (Negative amount should be indicated by a minus sign.)

Incremental net operating income________

b.

Would the increased fixed selling expenses be justified?

No

Yes

2.

Assume again that Richter Company has sufficient capacity to produce 79,200 Wims each year. The company has an opportunity to sell 7,200 units in an overseas market. Import duties, foreign permits, and other special costs associated with the order would total $3,600. The only selling costs that would be associated with the order would be $4.20 per unit shipping cost. Compute the per unit break-even price on this order. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Break even price per unit_____

3.

One of the materials used in the production of Wims is obtained from a foreign supplier. Civil unrest in the supplier’s country has caused a cutoff in material shipments that is expected to last for three months. Richter Company has enough material on hand to operate at 25% of normal levels for the three-month period. As an alternative, the company could close the plant down entirely for the three months. Closing the plant would reduce fixed manufacturing overhead costs by 30% during the three-month period and the fixed selling expenses would continue at two-thirds of their normal level. What would be the impact on profits of closing the plant for the three-month period? (Round your intermediate calculations of units produced and sold to the nearest whole number. Do not round your other intermediate calculations. Round your final answer to nearest whole number.)

Net___________ of closing the plant____________

4.

The company has 700 Wims on hand that were produced last month and have small blemishes. Due to the blemishes, it will be impossible to sell these units at the normal price. If the company wishes to sell them 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 cost________

5.

An outside manufacturer has offered to produce Wims and ship them directly to Richter’s customers. If Richter Company accepts this offer, the facilities that it uses to produce Wims would be idle; however, fixed manufacturing overhead costs would continue at 30%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be reduced by 60%. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Total relevant unit cost_______

Richter Company has a single product called a Wim. The company normally produces and sells 72,000 Wims each year at a selling price of $37 per unit. The company’s unit costs at this level of activity are given below:

Explanation / Answer

1a)

Increase in fixed selling expense id NOT justified

2)

3)

4)

per unit ($) 72000 units Selling price 37 2664000 Direct material 6.1 direct labour 10 variable manufacturing overhead 3.7 variable selling expenses 4 23.8 1713600 Contribution 13.2 950400 Fixed Cost Fixed Manufacturing Overhead 360000 Fixed Selling Expenses 410400 770400 Net Income 180000

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