Richter Company has a single product called a Wim. The company normally produces
ID: 2481857 • Letter: R
Question
Richter Company has a single product called a Wim. The company normally produces and sells 84,000 Wims each year at a selling price of $36 per unit. The company’s unit costs at this level of activity are given below:
Direct materials $ 8.20
Direct labor 10.00
Variable manufacturing overhead 2.20
Fixed manufacturing overhead 5.00
Variable selling expenses 5.60
Fixed selling expenses 4.10
Total cost per unit $ 35.10
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 500 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 70%. 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
3. If company continue with 20% capacity for three months
Profit will be
Sales 84000 units*20%*$36 = $604,800
Less: Variable Cost = 16800 units*$20.4 = $342,720
Fixed Manu. Overhead = $420,000
Variable Selling Expenses = $94,080
Fixed Selling Expenses = $344,400
Profit / (Loss) = ($596,400)
Total Loss of three months = $1,789,200
If company close the unit for 3 months
Total Fixed Manufacturing Expenses = $420,000 * 3 * 65% = $819,000
Total Fixed Selling Expenses $344,400 * 3 * 2/3 = $688,800
Total Fixed Cost = $1,507,800
If company close the unit for 3 months, loss will be $1,507,800/-
4. Minimum Selling price will be the total Variable cost i.e 8.20+10+2.20+5.60 = $26
5. Computation of the unit cost
Direct Material = $ 8.20
Direct Labour = $10.00
Variable Manufacturing Expenses = $2.20
Fixed Manufacturing Expenses = $1.75 (5*35%)
Variable selling Expenses = $1.68 (5.60*30%)
Fixed Selling Expenses = $4.10
Total Unit Cost = $27.93
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