Burns Industries currently manufactures and sells 21,000 power saws per month, a
ID: 2480628 • Letter: B
Question
Burns Industries currently manufactures and sells 21,000 power saws per month, although it has the capacity to produce 36,000 units per month. At the 21,000-unit-per-month level of production, the per-unit cost is $67, consisting of $41 in variable costs and $26 in fixed costs. Burns sells its saws to retail stores for $81 each. Allen Distributors has offered to purchase 5,100 saws per month at a reduced price. Burns can manufacture these additional units with no change in its present level of fixed manufacturing costs.
Assume that Allen Distributors offers to purchase the additional 5,100 saws at a price of $48 per unit. If Burns accepts this price, Burns' monthly gross profit on sales of power saws will:
-decrease by 168300
-decrease by 96900
increase by 35700
increase by 244800
Using an incremental analysis approach, Burns should consider accepting this special order only if the price per unit offered by Allen is at least:
-26
-67
-81
-41
Burns decides to accept the special order for 5,100 units from Allen at a unit sales price that will add $102,000 per month to its operating income. The unit price Burns charging Allen is:
-$41
-61
-67
-81.
Burns Industries currently manufactures and sells 21,000 power saws per month, although it has the capacity to produce 36,000 units per month. At the 21,000-unit-per-month level of production, the per-unit cost is $67, consisting of $41 in variable costs and $26 in fixed costs. Burns sells its saws to retail stores for $81 each. Allen Distributors has offered to purchase 5,100 saws per month at a reduced price. Burns can manufacture these additional units with no change in its present level of fixed manufacturing costs.
Assume that Allen Distributors offers to purchase the additional 5,100 saws at a price of $48 per unit. If Burns accepts this price, Burns' monthly gross profit on sales of power saws will:
-decrease by 168300
-decrease by 96900
increase by 35700
increase by 244800
Using an incremental analysis approach, Burns should consider accepting this special order only if the price per unit offered by Allen is at least:
-26
-67
-81
-41
Burns decides to accept the special order for 5,100 units from Allen at a unit sales price that will add $102,000 per month to its operating income. The unit price Burns charging Allen is:
-$41
-61
-67
-81.
Explanation / Answer
In the present case the fixed cost of comapny is fixed even it incresses production of 5100 units.
If the production will increase by 5100 units then the gross profit will increase by 5100*(48-41) = 5100*7 = 35700
here 48 is the sale price and 41 is the variable cost and fixed cost will be the same.
Using the incremental analysis approach Burns should consider accepting this special order only if the price per unit offered by Allen is at least 41 as this is the varible cost per unit incurred by the company for production of each extra unit from present volume of production.
Burns decides to accept the special order for 5,100 units from Allen at a unit sales price that will add $102,000 per month to its operating income. The unit price Burns charging Allen is 61 per unit as contribution per unit increase by 20 per unit i.e 102000/5100units = 20 , and the variable cost per unit is 41, so sale price is 41+20 = 61
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