MZE Manufacturing Company has a normal plant capacity of 37,500 units per month.

Question

MZE Manufacturing Company has a normal plant capacity of 37,500 units per month. Because of an extra large quantity of inventory on hand, it expects to produce only 30,000 units in May. Monthly fixed costs and expenses are $112,500 ($3 per unit at normal plant capacity) and variable costs and expenses are $8.25 per unit. The present selling price is $13.50 per unit. The company has an opportunity to sell 7,500 additional units at $9.90 per unit to an exporter who plans to market the product under its own brand name in a foreign market. The additional business is therefore not expected to affect the regular selling price or quantity of sales of MZE Manufacturing Company

Explanation / Answer

Selling price per unit = $13.50

Less: Variable cost per unit = $8.25

Contribution per unit = $5.25

Total Contribution = $5.25*30,000 = $157,500

Less: Fixed Cost = $112,500

Profit on sale of 30,000 units = $45,000

The additional units that can be sold are 7,500 units at a price of $9.90 which gives a contribution of $1.65 ($9.90-$8.25) which gives additional profit of $12,375 ($1.65*7,500) as fixed cost is not relevant for additional sales.

Hence, total profit will be $57,375 ($45,000+$12,375)

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