Sandusky Inc. has the following costs when producing 100,000 units: Variable cos

Question

Sandusky Inc. has the following costs when producing 100,000 units:

Variable costs

$600,000

Fixed costs

900,000

An outside supplier is interested in producing the item for Sandusky. If the item is produced outside, Sandusky could use the released production facilities to make another item that would generate $150,000 of net income. At what unit price would Sandusky accept the outside supplier's offer if Sandusky wanted to increase net income by $120,000?

Variable costs

$600,000

Fixed costs

900,000

Explanation / Answer

Calculation of contribution margin per unit when production facility used for another item Contribution margin = Fixed cost + net income = 900000 + 150000 = $10,50,000 Contribution margin per unit = $1050000/100000 units = $10.50 per unit Calculation of overall contribution margin per unit when production facility used for another item and first item produced outside Total Units = 200000 units Required net Income = $150000 + $120000 = $270000 Contribution margin = Fixed cost + net income = 900000 + 270000 = $11,70,000 Contribution margin per unit = $1170000/200000 units = $5.85 per unit Unit price at which Sandusky accept the outside supplier's offer = $10.50 - $5.85 = $4.65 per unit

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.