Name on Request Company produces a single product called Thing. The company norm
ID: 2462380 • Letter: N
Question
Name on Request Company produces a single product called Thing. The company normally produces and sells 50,000 Things each year at a selling price of $50 per unit, The company's unit costs and total costs at this level is given below:
Direct Materials
Unit Cost
$15
Total Cost
$750,000
Direct Labor
8
400,000
Variable Manufacturing Overhead
3
150,000
Fixed Manufacturing Overhead
9
450,000
Variable Selling Expenses
4
200,000
Fixed Selling Expenses
6
300,000
Cost per Unit and Total Cost
$45
$2,250,000
Answer the SIX questions below relating to the production and sale of Things. NOTE: Each question is INDEPENDENT.
5. Due to a fire at its supplier's plant, Name on Request Company is not able to purchase more material for the production of Things. The supplier expects repairs to be completed in three months. Name on Request has enough material on hand to operateat 40% of normal levels for the three month period. As an alternative, Name on Request could close its plant down entirely for the three months. If the plant were closed, fixed manufacturing overhead costs would continue at 60 % of their normal level during the three month period, and fixed selling expense would be reduced by 20 %. What would be the impact on profits of closing the plant for the three month period? (Show your calculation),
Direct Materials
Unit Cost
$15
Total Cost
$750,000
Direct Labor
8
400,000
Variable Manufacturing Overhead
3
150,000
Fixed Manufacturing Overhead
9
450,000
Variable Selling Expenses
4
200,000
Fixed Selling Expenses
6
300,000
Cost per Unit and Total Cost
$45
$2,250,000
Explanation / Answer
Calculation of profit for the year Per unit in $ In Units Total in $ Sales 50 50000 2500000 Less : Variable cost - Direct Material 15 750000 - Direct Labour 8 400000 - Variable Mfg Overheads 3 150000 - Variable selling overheads 4 200000 Contribution margin 1000000 Less : Fixed cost - Fixed Mfg Overheads 450000 - Fixed selling overheads 300000 Profit 250000 If plant were closed , Request Company has to incurr the 60% of fixed manufacturing overheads and 80% of fixed selling exp. 60% of Fixed manufacturing exp. = 450000 * 60% = $270000 Hence for 3 months Fixed manufacturing exp.would be = (270000/12)*3 = $67500 805 of fixed selling exp.= 300000*80% = $240000 Hence for 3 months Fixed selling exp.would be = (240000/12)*3 = $60000 Hence the unavoidable fixed expenses = $67500 + $60000 = $127500 Impact on profit of closing the plant for the three month period would be reduction in profit by $127500. Yearly profit figure would be = $250000 - $127500 = $122500
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