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 75,000 Wims each year at a selling price of $43 per unit.

The company’s unit costs at this level of activity are given below:

Direct materials $ 8.10

Direct labor 13.00

Variable manufacturing overhead 4.90

Fixed manufacturing overhead 4.00

Variable selling expenses 5.70

Fixed selling expenses 6.00

Total cost per unit $ 41.70

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 90,000 Wims each year without any increase in fixed manufacturing overhead costs. The company could increase sales by 20% above the present 75,000 units each year if it were willing to increase the fixed selling expenses by $110,000. a. Calculate the incremental net operating income. (Negative amount should be indicated by a minus sign.) b. Would the increased fixed selling expenses be justified? Yes No 2. Assume again that Richter Company has sufficient capacity to produce 90,000 Wims each year. The company has an opportunity to sell 15,000 units in an overseas market. Import duties, foreign permits, and other special costs associated with the order would total $9,000. The only selling costs that would be associated with the order would be $4.70 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.) 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 20% 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 35% 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.)

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.)

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 35%. 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.)

Explanation / Answer

Calculation of Incremental Net operating Income Incremental Units of sales 15000 Selling Price 43 Less: Variable Cost Direct materials 8.1 Direct labor 13 Variable manufacturing overhead 4.9 Variable selling expenses 5.7 Total variable cost 31.7 Contribution margin per unit 11.3 Contribution for 15000 units of sale 169500 Less: Incremental selling expenses 110000 Incremental revenue 59500 b) Yes it is justified to incurr additional selling expenses as there is increase in profit As there is additional capacity so fixed manufacturing overhead and selling expenses is irrelevant only incremental fixed selling expenses is relevant Ans 2 Direct materials 8.1 Direct labor 13 Variable manufacturing overhead 4.9 Variable selling expenses 4.7 Total variable cost 30.7 Fixed cost 9000 No,of units 15000 Fixed Cost per unit 1.67 Break even price 30.7+1.67 32.37 Ans 3 Savings Reduction in fixed manufacturing cost (4*35^) 1.4 Reduction in fixed selling6cost (4*1/3) 1.33 Direct materials 8.1 Direct labor 13 Variable manufacturing overhead 4.9 Variable selling expenses 5.7 Total cost saving per unit 34.43 90000*20%*3 months 54000 units Total cost saving 1859400 Loss of sales 54000*43 2322000 Net Loss -462600 Ans 4 Minimum Selling price Direct materials 8.1 Direct labor 13 Variable manufacturing overhead 4.9 Variable selling expenses 5.7 Minimum Selling price 31.7 Ans 5 Direct materials 8.1 Direct labor 13 Variable manufacturing overhead 4.9 Variable selling expenses (5.7*40%) 2.28 fixed manufacturing cost (5*35%) 1.75 Fixed selling expenses 6 Unit cost 36.03

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