Mazeppa Corporation sells relays at a selling price of $28 per unit. The company

Question

Mazeppa Corporation sells relays at a selling price of $28 per unit. The company's cost per unit, based on full capacity of 160,000 units, is as follows:

Mazeppa has been approached by a distributor in Montana offering to buy a special order consisting of 30,000 relays. Mazeppa has the capacity to fill the order. However, it will incur an additional shipping cost of $2 for each relay it sells to the distributor.

Mazeppa Corporation sells relays at a selling price of $28 per unit. The company's cost per unit, based on full capacity of 160,000 units, is as follows:

Explanation / Answer

Existing Net Income per unit at 160000 capacity Selling Price 28 Variable Cost    Direct Material 8     Direct Labor 6      Overhead ( 2/3 * 9) 6 Total Variable cost 20 Contribution 8 Fixed Cost ( 1/3 * 9) 3 Net Revenue 5 Total Fixed cost = 160000 * 3 = 480000 If order of 30000 relays are taken then per unit 30000 units Selling Price 28 840000 Variable Cost    Direct Material 8 240000     Direct Labor 6 180000      Shipping cost 2 60000      Overhead ( 2/3 * 9) 6 180000 Total Variable cost 22 660000 Contribution 6 180000 Mozeppa should accept this order as it gives a positive contribution and would increase the profits of the company as there is idle capacity and the fixed cost has already been incurred

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